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Emerging markets currencies endured an evil beating Friday as global markets adopted a decidedly “risk-off” tone. There were many causes of the sell-off, but weak economic data from China played an important role.
For Canadian investors, the apparent end of emerging markets outperformance has huge implications. Specifically, investors in the domestic mining sector should cherish their memories of the 2009 to 2010 boom, because it’s unlikely things will ever be that good again.
The chart shows how, in hindsight, the Canadian mining sector was easy money in mid 2009. Mining stocks were cheap, which made for a lucrative jump off point. But the big catalyst for the sector was an aggressive monetary policy in China. The Chinese government made a determined, sustained effort to restore economic growth by fully opening the spigots on credit.
It took about 12 months for the Canadian mining sector to feel the positive effects from Chinese policy. Under direct orders from the federal government, Chinese banks beginning in early 2009 started handing out loans to any local businessperson that asked.
Given the stage of China’s economic development, the majority of these funds were used for infrastructure and residential real estate construction. The result was a huge surge in commodities used to build things – copper, steel, coal, and the crude oil necessary to power the heavy equipment.
To say that China’s credit boom, and the surge in commodity demand that resulted, was beneficial toward Canadian miners is a massive understatement. Starting in September 2009, the S&P/TSX Diversified Mining index started a rally that saw stock prices climb 341 per cent by January 2012.
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