Base Metals Winners In 2013

Our Commodity & Energy Strategy service is looking to upgrade base metals from neutral to overweight soon, as evidence accumulates that Chinese growth is in a sustainable upswing. But which base metals should fare the best?

Base Metal Winners In 2013

C hina bears dominated in 2012. But a glance at the performance of base metals, an asset class closely tied to the health of the Chinese economy, tells a different story.

Tin, a metal widely used as solder in the electronics industry rose 21%. This makes sense given the 12% growth in cell phone usage over the past year, and similar strength in the adoption of PCs, TVs and other electronics. Closely following tin are lead and zinc, two metals that are tied to the booming automotive and infrastructure industries, respectively.

According to our commodities team, 2013 could be the year for copper and nickel.

  • First, many Chinese indicators have bottomed and/or are now inflecting higher and nickel has one of the highest sensitivities to a rising Chinese PMI.
  • Second, the supply stories for both metals are much less bearish than their performance rankings in 2012 would imply, suggesting some mean reversion.

Bottom Line: Nickel should shift from laggard in 2012 to leader in 2013H1, while copper should also outperform over a one-year horizon.

A Sea Change In Japan

Shinzo Abe and the Liberal Democratic Party (LDP) won a crushing victory in Japan’s general election this weekend. In the coming months, Japanese equities will behave as a bellwether for the LDP’s progress in pressuring the Bank Of Japan (BoJ) to become more aggressive.

Bullish Case For Japanese Stocks

A s we have previously highlighted, the bullish case for Japanese equities depends strongly on domestic politics and monetary policy. This weekend’s general election was unambiguous and gives the LDP a strong mandate. The party is calling on the BoJ to act aggressively: to increase the inflation target (currently 1%) and begin unlimited quantitative easing.

It is widely known that Japanese equities offer good value, but the strong yen continues to suffocate growth and sustain price deflation. Hence, the precondition to unlocking the Nikkei’s value is to reflate the economy and end deflation, both of which will require a substantial devaluation in the yen.

The sea change in political leadership offers the best chance in many years for this to occur. At the cusp of change, we recommend investors stay long the Nikkei on a hedged basis.

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