The only way you can predict the future is to build it

10 January 2022

By Mark Smith 

Central bank intervention has been unprecedented since the 2008-09 GFC with the introduction of quantitative easing (QE). Central bankers have been the mainstay of financial markets since then. Alone, the Fed, the ECB and the BoJ have seen balance sheet growth of over US$20trn in the period; this includes cUS$10trn in the last two years alone. 

As the ‘fiscal party’ winds down and the ‘market music’ stops, the macro betas in 2022 will be rising bond yields, inflation risk, a weaker US dollar and the rate of global growth. Central banks will taper their aggressive asset purchase programs and interest rates are likely to start heading higher; this transition presents some risks to the markets. 

Monetary policy is on most investors’ minds right now and with bond yields starting to rise in anticipation of higher interest rates, beaten-down value stocks could be the next winners.  Higher rates mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations and boosting the most lowly rated. Investors’ concern about an over-aggressive Federal Reserve choking off the U.S. recovery with possibly four rate hikes is gathering momentum.  Meanwhile negative real rates continue to spur massive flows into the equity and risk markets as the ever constant and irreversible monetary debasement continues.

Global equity derating?

Equity valuations have moved aggressively and in both directions over the past two years.  The 12 month forward P/E (median) for the S&P 500 collapsed from 19.5x to 13.2x in early 2020, but US shares re-rated sharply to 21.2x in the subsequent rally through to January 2021; European and UK shares followed a similar path.  This year, however, equity markets have started to derate with rising share prices not keeping track with an even stronger rebound in EPS; we expect this de-rating to continue in 2022.

Figure 1: Median 12-month forward P/E for global indices

Source: Berenberg

A key theme for 2022 will be valuation. 

Over the past 18 months, global equities have re-rated more than they de-rated since the start of the pandemic. When we look at the S&P 500 Shiller index (CAPE - defined as price divided by the average of ten years of earnings, adjusted for inflation), equities are more expensive than 1929 and not far behind the 2000 valuations.

Figure 2:  S&P 500 cyclically-adjusted total return P/E ratio

Source: Berenberg

The commodity outlook and the positioning of the Amati Strategic Metals Fund

The Amati Strategic Metals Fund attempts to replicate the broader market strategy through careful commodity and stock exposure.  We look for companies with a combination of strong fundamentals and attractive valuations, primarily value stocks. The ability to move between metal classes reduces the cyclicality of the sector, whilst taking advantage of emerging macro themes beneficial to metals.

Following on from a metal-intensive 2021, largely stimulated by quantitative easing, 2022 looks like a year where growth rates will stabilise and possibly decelerate. The legacy logistical issues stretching supply chains and depleting inventories should pass and we see less competition for raw material lots across commodity markets. The general growth trend (Industrial output) will likely be back towards the 3.5% year-on-year rate that was more typical pre-pandemic. 


Figure 3: Global Industrial Production Forecast

Source: BMO Capital Markets

Given the potential for a softening in certain commodities into 2022 and the fact that most are still trading at a premium to their cost curve, we continue to adopt a disciplined approach to using long term sustainable pricing in our financial modelling. Again we look for company specific value discrepancies and value through development and discovery in all metal classes.


Figure 4: Commodity prices vs. 90th percentile of the metal’s cost curve

Source: BMO Capital Markets

Inflation is not transitory in our view and is positive for precious metals.  The sentiment indicators and technical analysis are slowly building for a positive gold price rally.  The crest point for the wave of global monetary stimulus is upon us and under these conditions the potential for a sharp mean reversion is real (very bullish for gold).  Despite the negative impacts of inflation on capital projects and working costs, gold equities continue to trade at record low multiples when considering price to cash flow or enterprise value to EBITDA, especially when compared to the S&P500.


Figure 5: DJIA vs. Gold price

Source: Bloomberg

It is important to highlight that the gold producers are generating better revenue growth, profitability margins and return on capital and higher dividend yields than the S&P 500, but with lower valuations.

Figure 6: Gold Valuations of the NYSE Arca Gold Miners Index



Gold Miners Index

S&P 500




P/E Ratio



FCF yield






Return on Assets



Profit Margin



Source: Bloomberg (last financial reports as of 30/11/2021)

Miners to join the ‘Green Party’

Historically the mining industry has just been a supplier to global industry, not integrated in downstream products or services.  However the move to decarbonize the global energy supply has catalysed a mining move towards more partnerships with downstream industry. This is no more evident than for the lithium, graphite, nickel and REE miners and developers.  The strategy of the ASMF from the outset has been to invest in companies with quality assets that can attract a partnership from ‘mine to market’.

This theme will continue into 2022, where we expect this ‘partnership’ to encourage good stewardship between companies/industries.  The drive for better ESG standards will continue, with companies vetting counterparties. This is both in terms of equipment suppliers and downstream customers, to ensure a shared vision around carbon neutrality, safety, governance, and other core areas of strategy and key performance indicators. This will likely further strengthen the position of the larger players in the industry, and potentially act as a catalyst for further consolidation.  Quality attracts quality.

The miners are currently enjoying strong free cash flow.  The deployment of this capital will continue to be on operational improvements and carbon mitigation at existing assets. However, with the ex-growth nature of the industry now obvious, we expect M&A to continue, particularly in those commodities most exposed to the energy transition.  This is a multi-decade annuity in terms of demand, especially for critical metals and we see this interest enhanced by governments actively seeking reshoring of industry and hedges against concentrated supply risk.

We anticipate global mining expansion capex will rise by ~20% in 2022, though this will only be roughly half of 2012’s peak, while a proportion of the rise will come from simple inflationary effects rather than any uplift in activity.


Once again the ASMF has been positioned to invest in these metal sectors and in the small and mid-cap stocks to benefit from downstream integration and M&A. Now that the portfolio is largely constructed we will continue to grow the fund and build out positions to take advantage of this exciting future…

This article is a financial promotion issued by Amati Global Investors Limited, which is authorised and regulated by the Financial Conduct Authority. It is provided for informational purposes only and does not represent an offer or solicitation to buy or sell any securities, and nor does it provide you with all the facts that you need to make an informed decision about the merits or otherwise of this Fund. Please refer to the risk warning below.

Risk Warning

Past performance is not a reliable guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount they originally invested. The investments associated with this fund are concentrated in natural resources companies, which are subject to greater risk and volatility than companies held in other funds with investments across a range of industries and sectors. The return on investments in overseas markets may increase or decrease as a result of exchange rate movements. Shares in some of the underlying companies associated with the fund may be difficult to sell in a timely manner and at a reasonable price. In extreme circumstances this may affect the ability of the fund to meet redemption requests on demand.

Amati Global Investors Ltd, 8 Coates Crescent, Edinburgh EH3 7AL +44 (0)131 503 9115

Amati Global Investors is authorised & regulated by the Financial Conduct Authority. Calls are recorded and monitored.