Metals and mining stocks have taken a recent breather, but according to Jefferies, that pause could be exactly the kind of buying opportunity investors have been waiting for.
In a research note, the investment bank examined historical mining bull markets, including the 2003-2011 “China super cycle,” to put the current pullback in perspective. During that period, the STOXX Europe 600 Basic Resources Index (SXPP) experienced eight pullbacks of more than 15%, averaging a 30% drop from peak to trough. But rebounds were often much stronger, averaging 77%, and in the aftermath of the 2008-2009 financial crisis, the index surged as much as 193% from its lows.
“Pullbacks are a natural part of any bull cycle,” Jefferies analysts wrote. “History shows that dips often turn into attractive entry points ahead of rebounds.”
The analysts added that the current pullback, while notable, is consistent with normal volatility seen in past upturns. “Volatility tends to spike as cyclical peaks approach, but at these levels, the market still looks healthy,” they noted, citing a 21-day moving average of daily SXPP swings currently at roughly 1.5%. This is in line with the early-to-mid stages of the previous bull cycle, suggesting there may still be room for growth before a full-blown peak.
While the drivers of today’s cycle are different, moving from rapid emerging market growth to macro-driven rotation into real assets, Jefferies believes the fundamentals remain supportive. “We may still be in the early-to-middle innings of a prolonged metals bull cycle,” the analysts wrote. And generalist fund rotations and strong investor demand for real assets could continue to drive mining shares higher, they added.
“The path of least resistance for commodities and mining shares is still mostly higher,” Jefferies concluded. “Pullbacks should be expected, but they likely represent opportunities for investors to buy the dip before the next rebound.”