Some managers, like Axa Investment Manager’s Richard Marwood is beginning to add to both miners and oil and gas producers at the margins of his AXA Distribution Fund.
“The problem is the volatility in the top line. I think oil and mining are a little different. On the oil side it is not really a problem of demand, it is that there is more supply than is needed. On the mining side, however, it is that there is less demand, particularly in China,” Marwood explains.
But, added: “Ultimately those markets will correct themselves because the companies are making rational decisions, they are naturally tightening the market, spending less in capex. It will come into some kind of equilibrium but it will be a painful process.”
Alex Wright, manager of the Fidelity Special Situations Fund is also tentatively positive on the sector, although much more so in the oil and gas space than in the mining sector.
According to Wright there is currently limited evidence of positive change within the mining sector, and he expects the environment to remain challenging for most of the large miners.
“We are now seeing a different culture emerging at mining companies, with a more disciplined approach to capital allocation. The sector may look attractive at some stage, but for the time being, positive change is too far away to drive performance over the next year or two,” he says.
On the oil side, however, he is more positive, pointing out that he is already seeing some areas of positive change.
“The positions I have in this sector are in companies with solid balance sheets and low costs of production, as I am more comfortable that downside would be limited if prices don’t recover quickly. I have over 6% in a combined BG and Shell position, as I believe this deal will complete, and that the new business it creates will be a much stronger one, with improved free cash flow and strategic positioning in LNG.”
