Asset manager Coronation says it has taken a cautious approach to gold stocks, which are trading at multiyear highs, fuelled by the surge in the gold price, warning of the coming downturn cycle.
The price of gold is up nearly 50% this year, continuing its winning streak from last year as bullion cements its place as a safe-haven asset class in a highly uncertain global economy, prone to trade wars and geopolitical tensions.
Coronation, which marshals more than R750bn in assets under management, is happy to be underweight on gold stocks.
“Historically, every comparable gold bull market has been followed by a downcycle, resulting in steep losses for shareholders. Costs tend to follow prices higher, albeit with a lag. We expect the same from this cycle.
Furthermore, SA gold miners are characterised as inherently poor businesses due to being high-cost and having short mine lives that necessitate ongoing capital expenditure,” the asset allocators’ portfolio managers said in a note.
“These companies have historically been poor stewards of shareholder capital, exhibiting poor cost control, engaging in value-destructive pro-cyclical corporate action and failing to return cash to shareholders consistently.
“This informs our material underweight in gold equities. We are managing the overall size of the underweight given the range of the outcomes for the metal. Our preferred exposure remains AngloGold.”
Coronation said it had also reduced its exposure to Anglo American while upping its stake in Glencore.
“Glencore has lagged due to production mishaps in its copper assets as well as a lower thermal coal price. We see both as temporary, with the share price discounting continued bad news.”
Historically, every comparable gold bull market has been followed by a downcycle, resulting in steep losses for shareholders. Costs tend to follow prices higher, albeit with a lag. We expect the same from this cycle.
— Coronation
Anglo last month upped the ante in its copper play with the blockbuster merger with Canadian copper miner Teck in one of the biggest mining deals in more than a decade.
The mooted all-share merger will create a $53bn group, with scale and world-class copper assets that will allow it to credibly claim a top-five spot among the world’s biggest producers of the critical mineral.
Coronation said the Anglo-Teck merger ticked the right boxes. “We view this bid as a rare ‘unicorn’ in mining mergers & acquisitions: a deal in the right commodity, at a fair price with legitimate operational synergies.”
The asset manager has fallen back in love with Africa’s largest telecom group, MTN. To this end, the money manager added MTN’s stock in the third quarter, while it also bought a stake in Bytes Technology for the first time.
“MTN’s Nigeria and Ghana businesses are performing strongly, supported by robust data demand, disciplined commercial pricing and healthy competition dynamics. MTN has enviable competitive positions in both markets,” Coronation said.
“In Nigeria, a regulatory-backed price increase provides a further tailwind. Whereas a strong dollar has acted as a headwind … [it] has become a tailwind as the US dollar continues its weakening trend. The share price has pulled back after financial results creating an opportunity to rebuild our position.
“Bytes represents a high-quality play on structural growth in cloud computing, cybersecurity and AI-driven IT spend, particularly within the UK’s mid-market and public sectors.”
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