The mining sector has underperformed global markets for an unprecedented five straight years. A sixth wouldn’t come as a shock, but according to Citigroup analysts, fund managers are giving more thought to the possibility that the sector has bottomed and is poised to rally in 2016.
The broader question, however, is whether they actually care. The analysts suggested major fund managers are not too fussed about this sector, given that it represents less than one per cent of global equity market value after getting destroyed over the past few years.
“So even a 20 per cent rally in the sector would only result in an underperformance of (less than 20 basis points) for a global fund with no mining exposure,” they said in a note.
The Citi analysts said the mining industry seems to be in a “Back to the Future” situation, with the current bear market closely resembling the one experienced in the late 1990s and early 2000s. Commodity prices are low, M&A activity is subdued, and overall market weights during the two eras are quite similar.
Given the weak commodity environment, the analysts’ predictions for 2016 are pretty grim: dividend cuts, debt refinancing challenges, impairments, rating downgrades, management changes, forced capacity closures and other delights. In other words, more of the same.