For the better part of three years, investing in mining companies has been an exercise in extraordinary patience. A significant portion of the poor performance is attributable to the slowdown in emerging market growth. Economic weakness from China to Brazil to India has contributed to plummeting commodity prices and fresh lows for industrial metals.
Shares of miners suffered alongside commodity angst. Market Vectors Gold Miners (GDX) had been particularly battered, experiencing price erosion of 65% between May of 2011 and the end of 2013. The broader SPDR Metals and Mining (XME) depreciated 40% in value over the same time period. However, something unexpected may be transpiring. For example, since hitting the post-taper tantrum lows in late June, the SPDR S&P 500 Trust (SPY) appreciated roughly 17%, while XME rallied a more robust 27%. Remarkably, GDX has pole vaulted 30% this year alone. (Read “Is The Bear For Gold-Oriented ETFs Over?”)
An equally intriguing change in sentiment on resources-rich country ETFs may be developing here in 2014. Australia, New Zealand, South Africa, Indonesia — countries where a large percentage of global mining operations occurs — are bouncing back. The iShares MSCI Australia Fund (EWA) had a difficult time amassing less than 2% in 2013; EWA has already garnered a bit more than that this year. Indonesia experienced a bearish 23% decline last year, though the country may be able to credit a link to basic materials for the renewed interest in the first 10 weeks of 2014.
Credit the monstrous drop in the currencies where miners operate. When the Australian dollar or the South African rand or the Indonesian rupiah loses 10%-20% of value against a basket of other world currencies, the instinct to cut unhedged stock losses in those country ETFs is very strong. Nevertheless, valuations of miners and basic materials companies became more attractive as currency depreciation helped augment profitability.