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.
|Are Resources-Rich Country ETFs Worthy Of A Second Look?|
|2013||Approx YTD 2014|
|iShares MSCI New Zealand (ENZL)||12.5%||12.0%|
|iShares MSCI Australia (EWA)||1.8%||2.2%|
|iShares MSCI Canada (EWC)||5.3%||0.6%|
|iShares MSCI South Africa (EZA)||-7.5%||-3.0%|
|iShares MSCI Indonesia (EIDO)||-23.3%||15.8%|
|SPDR S&P 500 Trust (SPY)||32.2%||0.5%|
Mining companies may be a whole lot shrewder than some people think. In essence, when commodity prices tank, they often halt projects and cut spending. Shortly thereafter, if currency declines are steep enough, they are able to lower the costs associated with local wages and other expenses as they move forward on projects. In fact, the Wall Street Journal recently noted that several prominent names in the mining world — Rio Tinto, BHP Biliton, Anglo American — reaped their biggest rewards from foreign exchange gains in over a decade.
Granted, the operational benefits of currency declines is not something that materials-oriented companies can “take to the bank.” What’s more, further deterioration of global economic conditions might push commodity prices in a negatively reinforcing downward spiral, much the same way that industrial metals have been unable to get up off the mat. Then again, the recent surge in everything from natural gas to potash to precious metals may benefit the basic resources segment going forward.
Since the first week of January, I have had a number of moderate growth clients in iShares MSCI New Zealand (ENZL). The selection decision primarily came down to attractive fundamentals, the country’s projected gross domestic product (GDP) of 3.4% and the promise of yen/dollar carry traders “going long” on the New Zealand dollar. Still, New Zealand figures prominently in basic materials in much the same way that Australia does. In fact, New Zealand is the highest weighted country in the WisdomTree Commodity Country Equity Fund (CCXE).