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Mining equities show that markets are rational, even if politicians aren’t

Mining trucks
Dollar earning miners have rallied since the Brexit vote

Time for a quick roll call: Anglo American (LON:AAL), up 15% to 810p since the Brexit vote on June 23rd, Glencore (LON:GLEN) up 17% to 181.9p, RIO Tinto (LON:RIO) up 15% to 2,457p, BHP Billiton (LON:BLT) up 12% to 984p and Antofagasta (LON:ANTO) up 9% to 481p.

And over the same period the pound has dropped against the dollar from US$1.484 to US$1.312, or 12%.

Who says markets aren’t rational?

Because all the major miners book their revenue in dollars investors have marked them up proportionately to the amount the dollar has risen against the pound. But they’ve added a slight premium too. Why is this?  

First, uncertainty. Dollar earners are suddenly at a premium following the Brexit vote. And it’s not hard to see why, given that the future of the entire United Kingdom is in doubt - what will happen to its currency in the event of a breakup is anybody’s guess.

Second, because although events like Brexit and FOMC meetings get all the headlines, the market is also well aware that a tentative recovery is now underway in mining.

To be sure, it’s early stage. Some commodities like copper aren’t yet moving, which is why, relatively speaking, Antofagasta has underperformed the market.

But others, like iron ore, have bounced off multi-year lows.

And this effect has been feeding through into mining share prices all year, never mind Brexit or the deliberations of Janet Yellen - the 15% rises that Anglo and Rio have enjoyed since the Brexit vote simply cap off an extensive period of share price appreciation.

Since the beginning of the year Rio has risen by 36%. Anglo’s shares by contrast have nearly quadrupled. And the 17% rise that Glencore shares have enjoyed since Brexit pales in comparison to the near 100% rise that it’s enjoyed since the market bottomed out in early January.

BHP Billiton sits somewhere in the middle, up around 40% since the start of the year and even Antofagasta is up by 30%.

What is this telling us?

Firstly, that there’s more to the London market than the European Union.

The big movements in mining are geared towards the global economy, not the European economy, and certainly not the British economy.

Britain accounts for a fraction of global trade, a fraction of US international trade and a fraction of Chinese trade.

In fact, Britain’s biggest trading partner is the European Union and Britain’s biggest single earner is services.

Markets know this, and even if it is to the despair of socialists everywhere, markets are amoral.

So the thinking goes: if Britain wants to hurt its own economic standing in the world, that’s up to Britain. In the meantime, buy UK stocks with global exposure. Mining has done well. But so has one of Britain’s other major international earners – pharma. It’s not rocket science to join these dots up.

What’s more, the sharp rise in mining shares is instructive for another reason – namely that it hasn’t actually been that big.

Not if currency moves are taken into consideration too – this is something that every market professional knows, but not, apparently, every politician.

Witness Boris Johnson who argued in the days that followed the Brexit vote that the pound and the markets were “stable.” 

Wrong, Boris - the markets were voting with their feet by stampeding towards the dollar.

That negative reaction of dumping the pound found equilibrium in rising equities markets, which again it’s not rocket science.

But for Boris it doesn’t need to be – for one thing, he has an American passport and can hightail it out of the UK if the consequences of his Brexit views turn out to be too dire.

For another thing, now that Theresa May has put him in charge of foreign policy if things go wrong with the Brexit negotiations now the buck will stop directly with him – no ducking and weaving and no invocation of smoke and mirrors in the markets to hide behind.

As for mining equities, all this political jiggery pokery will certainly have an effect on how they’re priced in the UK as the pound yo-yos around from one pronouncement to the next. But ultimately it won’t affect what they’re worth.


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