A pinch of Viagra for Goldilocks

World’s top 12 mining stocks now worth $1 trillion, as global conditions continue to favour commodities and metals.

JOHANNESBURG - 

According to the Bank Credit Analyst, the global economy is on a Goldilocks path: "just enough liquidity and just enough growth". 

Provided the U.S. escapes a recession, analysts at BCA Research argue, the current environment is positive for commodity plays.

Seemingly with that in mind, commodity and metal prices continued to forge ahead on Tuesday, fuelling further investor fund flows into the world's leading mining stocks. The top 12 stocks in this category, led by BHP Billiton (BLT.L, £17.81 a share) which, alone, now carries a market capitalisation of $221bn, forged ahead on the day. The favoured theme within the broader resources sector continues to focus on quality and size; smaller mining stocks remain relatively neglected by comparison. 

 Analysts at BCA Research argue, counter-intuitively, that the slowdown in the US is "a welcome offset to credit demand and price pressures stemming from the ongoing emerging market boom in capital and infrastructure spending and wealth creation".

Currency effects are also fundamental to the outlook for commodity and metal prices. As has been demonstrated in quantity since the dollar entered a protracted bear market in early 2002, a falling US currency directly supports commodity and metal prices, and simultaneously curbs inflationary risks in the rest of the world via lower input prices in local currency terms.  

Further, the Federal Reserve, the US central bank, started to cut interest rates at a time when US narrow money growth was already booming. Although fears of deflation may cause short-term tumult in financial markets, BCA Research recommends focusing on themes that will attract capital as investor mindsets shift from fear back to greed. Precious metals have been among the favourite plays at BCA Research for some time; analysts also favour natural gas as an appealing long-term play. After a mini-mania in 2005 as hurricanes temporarily crushed supplies, natural gas prices have settled into a broad trading range and have disappeared from many investors' radar screens.

In sum, and seen from afar, analysis shows that global portfolio investment flows continue to move towards equities, commodities and currencies that are farthest from the US housing market, i.e. away from the epicenter of economic weakness. While the "go global" theme may now be widely embraced by investors, it may take some time before greed once again overhauls fear.

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