The Incoming Challenge in Metals and Mining Sectors and its Impact on Emerging Markets

The shift towards low carbon energy is a key part of addressing the climate challenge. McKinsey's January 2022 study 'How the metals and mining sector will be at the core of enabling the energy transition' defines the move to a net-zero economy as reliant on metals and mining, noting that solar or wind power require 200-300% more metals than gas-fired plants. Similarly, building electric or hydrogen engines requires more materials than traditional combustion engines.

The paper 'Return and Volatility Transmissions between Metals and Stocks' highlights the forecasting power of industrials and precious metals returns on the Emerging Asian Markets returns between January 2000 and June 2018 and during other sub-periods like the Great Financial Crisis or the Chinese stock market crash. It found a unidirectional return spillover from both precious and industrial metals to most of the Asian equity markets in the entire period as well as the other sub-period except during the Chinese crash. It also analyses optimal weights and hedge ratios and suggests that adding metals to a portfolio of emerging Asian stocks improves its risk adjusted returns and helps to effectively hedge against stock risk exposure. A naive 80/10/10 mixture between respectively Emerging Markets Index, Industrial Metal Spot Index and Precious Metal Spot index exhibit an annualised return of 4.50% subject to an annualised volatility of 19.20% over the last 30 years, compared to the Emerging Markets Index, which returned 3.86% annualised with an annualised volatility of 21.90%.

Benoit Lahaye
Junior Investment Analyst

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