Domestic and international demand have aligned with the historic seasonal trends for base metals. Seasonal analyst Don Vialoux recently told Investor’s Digest readers which two exchange-traded funds to buy as the best way to play this trend.
A perfect storm is brewing for base metals and the mining stocks that produce them, sparked by the North American stock correction that began in late January but founded on strong international demand. Seasonality-focused financial analyst Don Vialoux, co-founder of popular investing-related websites timingthemarket.ca and equityclock.com with his son and fellow analyst, Jon, notes that the global appetite for base metals is strong, as evidenced by impressive price increases of late.
For example, copper prices rose by about seven per cent the week of Valentine’s Day. Zinc prices reached a five-year high and nickel prices climbed to a three-year high.
Mr. Vialoux attributes the increases to higher demand for those resources domestically as well as from regions such as Europe, China, Japan, and developing countries. This lines up with the historic seasonal trends for base metals, which generally do best from mid-February until early May. (Wherever they do business, manufacturers and other industrial firms are buying raw materials in anticipation of ramping up operations following the winter.)
Furthermore, the analyst adds: “It’s been interesting watching what has been happening with the US dollar index weakening relative to the rest of the world. Since commodities in general had been suffering compared to hotter portions of the economy recently, that gives them more room to grow. At the same time, since the US dollar is weaker now than it was a year ago, any companies that derive their revenue from sources outside Canada and the US will enjoy a foreign exchange bump on their numbers, Mr. Vialoux explains. (The loonie is similarly weak compared to farther-flung currencies.)
Currency exchange helps North American producers
“The economic growth is actually faster in these parts of the world than North America, so that’s another positive going forward for base metals stocks,” he says.
“They’re getting a direct benefit from the change in the currency as well as the demand for these particular metals.”
For example, a US-headquartered company that receives 50 per cent of revenue from abroad would have seven per cent higher revenue in 2018 than last year simply because the US dollar is currently down 14 per cent compared to the beginning of 2017.
In fact, because so many commodities are priced in US dollars, the weak greenback has affected far more than just base metals.
Mr. Vialoux points out: “There’s amazing all-time high prices for lumber (above US$500 per thousand board feet). Almost all commodity prices are going higher.”
Similarly, grain prices have gone up close to 10 per cent since early January. One of the few contrarians, coffee, fell to a multi-year low on Feb. 20, but the analyst dismisses this is as the result of a supply glut rather than waning demand.
“The question is, is it going to continue getting higher from here? The answer is yes,” says Mr. Vialoux.
The two best ETFs to buy to play base metals trend
He highlights two ‘best buys’ to take advantage of the emerging base metals trend: the iShares MSCI Global Select Metals & Mining Producers ETF (NYSEARCA—PICK) and BMO Equal Weight Global Base Metals Hedged-to-CAD Index ETF (TSX—ZMT). “Those are probably the two top picks . . . looking at the market now and where it’s going in the next three months, those seem to be the two top candidates,” he says. Both exchange-traded funds are based on a basket of international and Canadian big-name miners, offering exposure to the industry as a whole. (The analyst also recommends the Global X Copper Miners ETF (NYSEARCA—COPX) for investors specifically chasing copper gains.)
According to the analyst, stocks related to base metals and forest products recovered the fastest and performed the best following hard, fast drops on the Dow and S&P 500 of about 12 per cent on Jan. 26. “You want to be in the strongest sectors when the market starts to show significant upside moves,” he says.
However, economic news continued to improve, and analysts continued to raise earnings estimates even while the stocks were down. Then, major US indexes such as the Dow industrial and transport averages, S&P 500, and Russell 2000 Index bounced back on their 200-day moving averages, implying things were better than feared, at least from a technical perspective.
In ZMT’s case, units lost 18 per cent off their mid-January high, and had regained 15 per cent as of Feb. 20. Forest products company Cascades Inc.’s share price captured a new high. Meanwhile, West Fraser Timber Co. Ltd. has rallied so strongly that Mr. Vialoux decided against naming it a ‘best buy’. (Those still interested may wish to note that lumber usually performs well until April.)
Despite the analyst’s short-term optimism, he cautions that investors should look to close any base metals trades by about the end of April. After that point, the US midterm elections and the attendant political jockeying will likely cast a pall over the market, he says.
This is an edited version of an article that was originally published for subscribers in the March 9, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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