Seasonality is a key driver of stock market returns. Most investors have probably heard of the adage that investors should go away in May and stay away (until September). One possible explanation for this is that in Europe, spring and early summer brings with it a big upsurge in dividend payouts – which helps boost sentiment. An outsized share of global equity dividends are paid in April and May, which coincides with strong seasonality (especially for April). In dollar terms, April/May represents a roughly US$300 billion cashflow back to equity investors, and a helpful technical. What’s that about a bird in the hand….Anyway dropping dividends after the early summer may also help explain why some investor’s I talk to are particularly cagey about the fast approaching long summer days. With Trump jumping up and down, and dividends on the decline maybe we’ll be in for some dismal Summer declines. According to a note out today from analysts at Morgan Stanley the dividend window “is now behind us. Dividends in most markets drop off significantly starting in June. Meanwhile, market performance from June through September tends to be weaker than average, with June seeing the lowest instances of positive returns of any month.” But there may be some good news – especially if you are Asian focused. According to MS “ several markets in Asia are an exception, with A-shares, Hang Seng and the TAIEX paying a significant share of their dividends between June-August, and seeing a better-than-average performance during these months. Our equity strategists are OW China within EM equities, and we are long A-shares versus EM equities within our top trades.”
Refiners go East
Sticking with that Asian theme, I have some depressing reading for Carbonistas i.e those looking for a radical reduction in our carbon emissions. As we all know, demand for oil and its various derivatives is on the increase in most emerging markets and this, according to research firm GlobalData, is likely to result in a huge increase in global refining capacity – in Asia. India and China alone are set to add “the most refining capacity of all countries over the period 2018-2022, according to leading data and analytics company GlobalData.
The company’s report ‘Global Planned Refining Industry Outlook to 2022’ forecasts global refining capacity to grow by 16.8% from 105.8 million barrels per day (mmbd) in 2018 123.6 mmbd in 2022, with new build refinery projects contributing around 15.9 mmbd.
Among regions, Asia has the most planned refinery capital expenditure (capex) up to 2022. Companies in 14 Asian countries will spend an aggregate amount of $261bn on new build refineries over the period 2018-2022. Particularly, refining operators in China and India are set to spend an estimated $54.6bn and $78.5bn respectively by 2022 and their refining capacities will increase by 3.4 mmbd and 3.1 mmbd respectively by 2022, should all projects be realized
GlobalData identifies Africa as the second highest region in terms of capex on new build refineries, with planned investment of $122.8bn to increase crude distillation unit (CDU) capacity by 3.3 mmbd by 2022. In the Middle East, eight countries have a total of 3.5 mmbd new build capacity over the forecast period, with associated capital spend totaling $92.5bn, while in North America, $30.1bn is planned to be spent to add 681 thousand barrels per day (mbd) to the region’s refining capacity by 2022. In terms of the announced capex, Ratnagiri in India, Nakhodka in Russia, and Pengerang and Yan in Malaysia are the top planned refineries in the world for the forecast period. In terms of capacity, Ratnagiri, Dayushan Island refinery in China and Lagos I will be the top three planned refineries to 2022
This is all excellent news I’m sure for engineering and industrial firms supplying the industry – and local hydrocarbon energy users – but rather less good news for planet Earth. All that refining capacity is going to fuel insatiable demand for oil and natural gas.
Unloved gold miners
I’ll finish off with another commodity twist – this time for gold. Whenever I talk to private investors I can pretty much guarantee that one conversation in three or four will turn to the subject of gold miners. Gold miner stocks are popular with retail investors and every one of them has a perfectly robust explanation about why these miners are unloved. In fact, I’d go so far as to suggest that gold miners currently represent one of the most contrarian picks in today’s market.
Analysts at fund management firm – and ETF specialists Van Eck – certainly seem to agree, which shouldn’t come as a surprise as they have a gold miners ETF. According to Joe Foster, Portfolio Manager and Strategist at Van Eck gold mining stocks currently out of fashion. According to Foster “due to a lack of demand, the gold mining sector missed its performance expectations last year. The market has shown a muted response to earnings, and this lack of interest has caused them to fall short of performance expectations.
The sustainability of gains from earnings has declined in the last two years. Meanwhile, losses on earnings misses have become much worse in the last few years and these losses have been sustained over a longer period. We are currently seeing a lack of buying interest and absent are those momentum players that follow the winners who beat earnings and the value seekers who invest in those companies which disappoint.”
This slightly gloomy analysis chimes with recent numbers from BullionVault which suggested that selling of physical gold had intensified in recent weeks. Contrarians might at this point spot an opportunity and Van Eck has helpfully provided three charts of key stocks that could be of interest.
But logic suggests that gold is being caught up within the US interest rates/dollar debate. Conventional wisdom has it that increasing interest rates and a stronger dollar is BAD news for gold – and thus gold miners. According to Van Eck’s Foster “ while $1,365 per ounce has been the ceiling for the gold price, the floor has been rising consistently since 2015. Ahead of a potential rate hike, gold could test its bottom line trend threshold this month. Given the resilience of the gold price as a result of geopolitical risks, trade tensions and inflation, we would be surprised to see gold fall below this level. However, in the second half of 2018, the gold price could again run against this latest cap of $ 1,365. A spark that moves the gold price through its $1,365 ceiling may rekindle interest in the miners.”
Maybe. Maybe not. I think gold is becoming more interesting as we move int what could be a more volatile period but I think we’re still some way from that point. My own sense is that we’ll see gold prices move ahead once we get closer to 3.5% US Treasury yields – at which point I’d expect signs of a slowdown in the all important US economy. At that point investor’s will start to get frightened. Until then, vol might remain low – and gold miners becalmed.