Commodities are and always will be a cyclical market, asserts Chris Berry of House Mountain Partners. That's why he's not sweating disappointing stock performance and flat pricing environments. But the self-described long-term bull on energy materials has big plans on how to play growth in the developing world, and he insists that now is the time for investors to position themselves ahead of an upswing. Find out about companies that have the cash, the assets and the strategy to create long-term shareholder value in this interview with The Mining Report.
The Mining Report: In your upcoming presentation in Europe, "The Economic Tug-of-War," you examine the future of the commodity sector. What are the implications for junior mining investors?
Chris Berry: Let's start off with the good news. I believe we're at the bottom of the cycle for the commodities. It's been a rough 18 to 24 months for the juniors, but the worst is likely behind us. That said, I don't think we have turned the corner yet toward a new growth cycle. The takeaway is that now is the time to reevaluate these companies with a view for where the global economy will be two or more years from now. The wind is no longer at the back of the entire commodity complex, which means you will need to pay closer attention to the supply demand dynamics of specific commodities.
For example, lithium and nickel have different markets, sources and demand drivers. I monitor each of these factors in detail from a top down perspective until I can drill down to the best junior companies focused on each metal or mineral.
My presentation, "The Economic Tug-of-War," highlights two competing forces: slow or stagnant growth in the developed world and above-trend growth in the developing world. Much of the macro economic data I see in the U.S. is disinflationary and arguably deflationary. Stagnant wage growth, no velocity of money, and flat commodity prices are not indicators of inflation.
This presents a major challenge for Central banks worldwide, most notably the U.S. Federal Reserve, the Bank of Japan and the European Central Bank, all of which are attempting to re-flate their respective economies through easy money policies like quantitative easing. Japan has instituted its "Three Arrows" policy, which essentially doubles the money supply almost overnight in an attempt to break that country's multi-decade deflationary spiral. These policies have certainly breathed life into equity markets, but have not helped the broader economy return to historical growth rates. One need only to look at year-to-date returns of equity indexes like the Nikkei or the S&P 500 to see the disconnect between the equity markets and the broader economy.
The Fed is trying to stoke inflation and lower unemployment through its bond-buying scheme. Attempting to solve a non-monetary problem (unemployment) with monetary tools (interest rates) has not been and likely will not be successful.
To be fair, there are some nascent economic bright spots. Industrial base expansion, capacity utilization, Purchasing Managers Index data and related metrics are improving globally. It remains to be seen, however, if this can be sustained.
The other side of The Economic Tug-of-War is the emerging world growth story. I remain very bullish on the long-term prospects in the developing economies despite the slowdown in growth rates across the region. According to The Economist, for 18 of the past 20 centuries, India and China combined had the largest GDP in the world. When viewed through this prism, the current slowdown is a mere blip.
Much of the debate surrounding emerging world growth centers on China (as it should). We know that the official (and debatable) growth rate of the Chinese economy is 7.8%. Despite the fact that the economy isn't growing at double-digit rates anymore, China is a much larger economy than it was even a few years ago. So you're seeing slower growth, but from a much larger base. There are numerous challenges the country faces, including reigning in shadow banking, pollution control and shaky demographics, but I still believe the country serves as a model for the shift in economic power we're seeing from West to East.
What is the takeaway for a junior mining investor? In the near term, you can expect the uncertainty and volatility to continue. With no specific reason for commodities to rocket higher in the near term as a group, this offers you the most valuable commodity of all—time—to take a closer look at select commodities and their trajectories.