Base metals will continue to struggle in the short term.
The sector is currently down 4.5% despite its strong surge in January, says Jennifer Law, vice president and portfolio manager of Canadian small cap at CIBC Asset Management. She’s the manager of the Renaissance Canadian Small-Cap Fund.
This is mainly because it plunged 7.2% in February, and due to widespread risk aversion that’s keeping people out of mining.
On the bright side, forecasts for the second half of this year are more positive, says Law.
She adds, “Valuation is not the issue, and confidence is beginning to move back into the [base metals] sector. Equities are very reasonable and are trading at discounts to their fundamental values.”
Moreover, “China has confirmed a growth target of 7.5% for 2013,” and there’s good overall economic growth supporting deep cyclical sectors.
Law says she looks at base metals like copper, for example, using long-term prices of $2.75 per pound.
Despite possible upward trends, investors should expect continued volatility. This will stem from specific company challenges and low global growth, as well as the political gridlock in the U.S.
Not to mention, there’s increased risk any time emerging markets release negative economic data. Choosing worthwhile investments requires both timing and skilled evaluation of companies’ underlying values, says Law.
Though the next two quarters will be difficult for base metals investors, sentiment is shifting in a positive direction because valuations are good and assets are scarce, since we’re not finding many new mines.