I reckon the big mining companies are good to follow for one important thing. They have a unique position at the start of the production chain for industry. And that makes their insights about the outlook for the world economy useful for investors.
The slump after the stock market crash
In today’s full-year results report, BHP (LSE: BHP) delivered some lacklustre figures. Net operating cash flow dropped by 10% compared to the year before. Underlying basic earnings per share rose by 2%, but the directors trimmed the full-year dividend by 10%. At least one figure did go up: net debt rose by 28% to just over $12bn.
Looking ahead, the company reckons the world’s economies will contract in 2020 because of the Covid-19 pandemic. However, China will fare better. But in 2021, BHP expects a “solid” rebound, albeit with “considerable variation” between countries.
However, even with the rebound, BHP expects the world economy to be around 6% smaller than it would have been without Covid-19. The company assumes it will take China and the developed world until 2023 to return to pre-Covid-19 trend growth rates. And developing economies outside East Asia “may take longer.”
But it’s not all bad news. Although inflation trends and exchange rates have been volatile, many of BHP’s uncontrollable cost exposures such as diesel, power, explosives and steel products have declined in the last six months. And other industries will likely be benefitting from reduced costs in those areas too.
BHP’s directors also point out that Covid-19 has profoundly affected national and regional labour markets. They think labour costs will remain lower than anticipated before the pandemic “for some years” in the mining industry. It seems reasonable to assume there’ll be downward pressure on wages in other sectors as well.
Bullish for the long term
BHP expects the ongoing uncertainty around the pandemic to constrain the risk appetite of households and businesses. And that will likely cause a dampening effect on the global economy. But the directors are positive about long-term global economic growth and commodity demand. They think population growth and rising living standards will drive demand “for decades to come” for the products BHP provides such as energy, metals and fertilisers.
Looking back, the stock market has done well over the past decades, despite many previous challenging times. So investing in shares backed by good-quality businesses will probably work out well if we aim to hold our investments for many years.
I’d research quality stocks in a range of sectors to buy and hold, such as Unilever, Diageo, Sage, PZ Cussons and many others. But I’m not keen on exposing my portfolio to BHP right now. Shares backed by cyclical businesses can be decent vehicles for making a bet on the next up-leg. But the share is trading in the middle ground. And I’d want to see it in an obvious cyclical trough before investing.
