Resources shares tumble on recession fears

Concerns over global growth slowing have finally started to hit miners’ previously strong share prices, while exchange traded funds (ETFs) and trusts have also seen major selling, as investors get jittery over global recession forecasts and China’s potentially shaky recovery from Covid-19 lockdowns. 

“The commodity sector is increasingly being spooked by the recession ghost,” said Ole Hansen, head of commodity strategy at Saxo Bank. “There is no doubt that some of the recent froth is currently being taken out of the market. This is partly driven by macro-orientated funds [that] bought the rally but now are having second thoughts as the risk of an economic slowdown looms ever larger.”

The BlackRock World Mining Trust (BRWM) and BlackRock Energy & Resources Income Trust (BERI) were both down 18 per cent in the past month, respectively. CQS Natural Resources Growth and Income (CYN) has come off 15 per cent even as its net asset value (NAV) has remained higher, resulting in the share price discount to NAV ballooning out from around 3 to 18 per cent as of the end of last week. 

Rob Crayfourd and Keith Watson, managers of CQS Natural Resources Growth and Income, put the sell-off down to a “speculative positioning wash-out”, arguing that the likes of hedge funds and quantitative macro funds had reduced tactical allocations to oil on the back of recession fears. That in turn has triggered margin calls, forcing other fund managers to cut back on their positions.

The team added that the fund’s NAV had “held up well versus the broader market weakness”, helped in part by a reduction in gearing well ahead of the sell-off. They have positioned for a challenging economic scenario by loading up on exposure to oil and gold while reducing allocations in the base metal space, viewing the latter as more economically sensitive as demand has a higher discretionary component.

The trust’s shares have nevertheless been hit hard and Crayfourd believes the conditions driving volatility – both on the downside and the upside – could continue into the summer. “All Keith and I can do is look through short-term noise and, where valuations are cheap, especially in energy, we’re using that to add to names,” he said.

Analysts at Australian bank Macquarie said base metals, including copper and nickel, would see weaker prices in the coming quarters as “current prices are more than incentivising a sufficient supply response”. 

The miners themselves have done better than funds this week, after China relaxed some Covid-19 restrictions. Rio Tinto (RIO), BHP (BHP), Anglo American (AAL) and Glencore (GLEN) have seen share price drops of between 5 and 18 per cent (with Anglo American seeing the worst of it) over the past month. Outside the diversified majors, copper miner Antofagasta (ANTO) is one of the weaker FTSE performers as it has struggled with operational challenges as well as the lower copper price. 

Macquarie’s base case is for a tougher 2023, after metals prices recover late this year. “[The end of 2022] should be as good as things get, with China failing to sustain a strong growth cycle and developed markets falling into a technical recession by summer 2023,” the analysts said. 

Tom Price at Liberum was also pessimistic in a note, arguing macroeconomic trends would drive copper down. “The US Federal Reserve’s undaunted determination to lift local rates via rate hikes [quantitative tightening] is a bear factor for copper’s price performance,” he said. “Selling pressure from the macro-shift is likely to persist until 2023.”