Hello, Dr. Copper? If Inflation Is on the Way Back Then This Is How You Play It.

Beckett Bronze Company was incorporated May 21, 1913 as the Delaware Brass and Aluminum Company by a group of stockholders which included John Beckett, a molder, and his son, Charles. Charles Beckett eventually bought out the other stockholders, including his father, and managed the company until his death in 1960.

Dr. Copper is about to make a comeback.

So say analysts at Morgan Stanley, who suggest a “faster V-shaped recovery and rising inflation expectations” are the perfect backdrop for mining stocks. “Copper stands to be the largest beneficiary, given its tight supply into 2021,” a team led by Alain Gabriel told clients in a note. And with that, mining stocks are a solid play, he said.

Morgan Stanley said its economists are now calling for a “global synchronous recovery” from the second quarter of 2021 onward, providing a coronavirus vaccine is widely available in the first quarter of next year.

Drug companies are racing to push out a vaccine to halt the deadly pandemic, with several hoping they will have enough data to submit vaccines for approval by early 2021.

“While most large EM [emerging market] ex-China economies lagged behind in the initial recovery phase, growth should accelerate from 2Q21 supported by external demand. As inflationary forces continue to align, our economists believe the case for a return of inflation is now stronger than before,” said Gabriel. “This constitutes a positive backdrop for mining equities.”

Metals, on average, he pointed out, have climbed between 13% and 47% in the 12 months after a rise in inflation expectations. Gold will often underperform those base metals, but the Federal Reserve’s new inflation target points to real rates staying lower for longer, which is also a boost for gold.

Still, where copper wins out is that supply is tight, inventories are low and its price has seen a strong response in the past to previous cycles of reflation. Gabriel said they see prices to rise gradually to $3.5/pound by the fourth quarter of 2021 in the base case, and a bull case of $4/pound in 2021 if growth picks up further.

As for the stocks, Morgan Stanley likes Glencore, Lundin Mining Corp. and First Quantum Minerals. Glencore and First Quantum trade on 2021 free cash flow yields of 15% to 16% and can rapidly de-lever, while Lundin offers a five-year compound annual growth in earnings before interest, taxes, depreciation and amortization of 16%/10% on spot/base case and superior shareholder return potential, said the bank.

The analysts also like steel equities, noting that accelerating domestic demand is prompting China to withdraw from export markets and tighten up on seaborne supply. For steel, they like ArcelorMittal.

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