Benchmark three-month copper prices on the London Metal Exchange have risen 10.5% in 2024 to the highest since June 2022, and are up nearly 20% since a low in October last year.^[1] Several drivers have this year led to forecasts for tighter supply and increased demand — from mining shortages, to stronger Chinese consumption and reduced output, faster-than-expected US inflation and a new embargo on exchange trading of Russian copper. 

Figure 1: Copper price in London

_{Source: LME. Price for 3-month delivery.} 

More broadly, the copper market has reacted to increasing expectations that the global economy has avoided a “hard landing” recession, bolstering the outlook for a commodity that’s key in factories, energy, data centers and in the rollout of electric vehicles. Analysts predict the red metal has entered a “secular bull market” that may lift its price to a record, from USD 9,402/ton on April 12.^[2]

“The strong performance of the industrial metals complex over the year so far is a trend we expect to gather momentum ahead,” Goldman Sachs analysts Nicholas Snowdon and Lavinia Forcellese wrote in a research note on April 15.^[3] “This view particularly resonates with copper and aluminium, given the unprecedented fundamental shortfalls facing both metals over the next three years.”

“While the apparent troughing in the global industrial cycle presents a broadly supportive demand factor, it is only for copper and aluminium that fundamentals present a structural extension in bull market, tied to a combination of high green transition demand leverage, underinvested predominantly long-cycle supply dynamics, and already extremely low inventory cover,” the analysts added. 

Goldman Sachs expects copper prices to reach USD 12,000/ton in 12 months, underpinned by “a significant deficit phase from Q2 onwards until year-end.”

Figure 2: Quarterly and yearly copper balance (Goldman Sachs)

_{Source: Goldman Sachs Global Investment Research, BNEF, Woodmac, ICA, ICSG. Kt = thousands of tons.}

Stock rally

Investors have responded to rising metal prices by snapping up the shares of copper miners. The STOXX^® Global Copper Miners index rose 16.3% in March,^[4] its strongest monthly showing in three years and the highest return among 35 STOXX Thematic indices (Figure 3). In the past year, the gauge has gained 14%. 

Figure 3: 1-year and 1-month performance of STOXX Thematic indices

_{Source: STOXX. Gross returns in USD.} 

The STOXX Global Copper Miners index was introduced last year and tracks companies with the highest revenues from, and largest market share in, mining the metal. 

The index underlies the iShares Copper Miners UCITS ETF from BlackRock, launched in EMEA last year, which led gains among all copper equities ETFs in the month through April 10 according to Trackinsight data.^[5]

Figure 4: STOXX Global Copper Miners index 1-year return

_{Source: STOXX. Gross returns in USD.} 

In an interview in January this year, Omar Moufti, Thematics and Sectors Product Specialist for iShares EMEA, said the mining segment may face long-term supply shortages after multiple years of underinvestment. Besides this industry backdrop, Omar explained, there are fundamental drivers for so-called essential metals such as copper, particularly linked to the transition to a low-carbon economy and the related need for electrification.

“There are important constraints that have led or could lead to a large supply-demand gap” in copper and lithium, Omar said at the time. “If the forecasted demand for the metal increases, the limited potential for supply to follow suit paints a constructive backdrop for metal prices, and thus miners.”

BlackRock has also launched in EMEA the iShares Lithium & Battery Producers UCITS ETF, tracking the STOXX^® Global Lithium Miners and Battery Producers index.

The STOXX copper and lithium indices offer focused strategies within the broader metals and mining industry segment. Still, they remain diversified: over 30 companies in the case of the copper index. They allow investors to tap growing demand for metals and the rising profitability of miners, presenting an alternative to buying the underlying commodities or their derivatives.

Figure 5: STOXX Global Copper Miners index – Top 10 holdings

_{Source: STOXX. Data as of April 15, 2024.}

Economic upside

Copper is proving its status as a proxy for global growth. China’s manufacturing activity expanded at the fastest pace in 13 months in March, while that in the US grew last month for the first time in 1-1/2 years. 

According to Goldman Sachs, copper prices have historically risen 25% on average in the 12 months after a trough in global manufacturing indicators. 

Given the outlook for undersupply in the market, the prospect for lower interest rates and signs of a resurgent Chinese economy, the strong performance of copper this year may be more than justified. For investors, targeting the shares of specialized miners may be an efficient way to capture the upside of a world hungry for essential metals.  

^[1] Data through April 12, 2024.

^[2] “Bulls jump deeper into copper amid supply challenges, AI-fueled demand,” Reuters, April 15, 2024.

^[3] Goldman Sachs Commodities Research, “Metals Comment: Assessing the LME Russian ban impact,” April 15, 2024.

^[4] Gross returns in USD.

^[5] Source: ETF Stream, “Copper shortage leads surge in mining ETFs.”

Figure 1: STOXX Thematics universe, selected indices

_{Source: STOXX. For illustrative purposes only, not an exhaustive list.}

Thematic investors find themselves at a singular point. Fast societal and business change in our world is constantly generating new themes. At the same time, evolving technologies and ever-smarter datasets are enabling new methodologies to best harness the impact of that change. Index levels recovered last year from the dip in 2022, when a sell-off in the most growth-oriented parts of the market served as a reminder that thematic investing carries with it a risk, and that long-term performance is not immune to cyclical headwinds. 

Despite market and economic volatility, many investors have allocated money into thematic strategies either for the potential for outsized returns, portfolio diversification (more on this below) or even as an inflation hedge. 

Long-term performance

A key characteristic of thematic investing is that it aims to capture the upside of multi-year structural change, as opposed to the shorter economic cycles and annual corporate calendars that often dictate returns in large pockets of the market. This coincides with the findings of a survey from BNP Asset Management last June. In it, 34% of polled investors said thematic investing has a positive impact on returns in periods up to three years. In contrast, 84% said thematic investing has a positive impact on performance over periods of up to five years.

This is backed up by the performance of our indices in the past decade. Almost 80% of STOXX’s thematic indices beat the STOXX^® World AC index over the past ten years, while about two-thirds did so over the past five years (Figure 2a). 

In more recent years, on the other hand, thematic funds faced a challenging environment as central banks aggressively raised interest rates to fight inflation. As such, the ratio of outperforming thematic indices over the past two years fell strongly, to under 30%. As thematic indices bounced back in 2023, the ratio of outperforming thematic indices in the past 12 months jumped back to 65%. Gains came around as investors predicted the world was headed for looser monetary policy. 

Figure 2: Share of outperforming STOXX Thematic indices by period and year

a. By rolling period

_{Source: STOXX, based on data available for the 34 STOXX thematic indices featured in Figure 1. Total returns in USD. Performance is relative to the STOXX World AC. Based on available data for the periods considered. Data through December 2023.}

b. By calendar year

_{Source: STOXX. Same as above.}

Figure 3 shows the average total return in a representative set of STOXX Thematic indices in red and those of the benchmark STOXX World AC in blue. Thematic indices amply outperformed when considering the last ten- and five-year periods, but that advantage disappears when taking the past two and three years. 

Figure 3: Total returns

_{Source: STOXX, total returns in USD for the 34 indices featured in Figure 1. Data through December 2023.} 

While offering higher potential returns, thematic investing usually carries higher volatility than benchmarks. This is to be expected from portfolios that are narrower and more targeted.

Diversification

One of the appeals of thematic indices is that they can help reduce a portfolio’s correlation to benchmarks and to the economic cycle^[1], enabling investors to hedge their risk.

For example, the STOXX^® Global Broad Infrastructure index has a beta of 0.76 to the STOXX World AC. Assets with a beta of 1 move in tandem. At the high end of the spectrum, the STOXX^® Global Copper Miners index has a beta of 1.76, and the STOXX^® Global Smart Cities scores a beta of 1.73.

The year of the ‘Magnificent Seven’

Looking at 2023’s performance within the three clusters in the STOXX Thematics suite, Future Technology delivered an average return of 43% in the year, followed by Socio-Demographics (+29%) and Environment (+6.8%). 

The STOXX^® World AC NexGen Software Development (+75%) and the STOXX^® Global Artificial Intelligence (+71%) led gains, confirming the standing of artificial intelligence as last year’s ‘hot topic.’ Both indices are dominated by members of the ‘Magnificent Seven’ group of stocks that drove gains last year: Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla. 

Figure 4 shows the one-year performance through December of the STOXX Thematic indices (vertical axis) vs. the weight of the Magnificent Seven in each index (horizontal axis) as of the end of the period. 

A linear trend is generally observed, where the larger the presence of Magnificent Seven stocks, the better the index performance. Nevertheless, there are some notable outliers such as the STOXX^® Global Industry 4.0 (43%), which did not feature any of the stocks.

Figure 4: Sway of ‘Magnificent Seven’ stocks

_{Source: STOXX.}

Expanded ecosystem

Thematic investing has established a foothold in professional investment portfolios, with new themes and ways to target them — such as listed futures — coming to the market. Our analysis shows that the strategies can outperform over multi-year periods that encompass different macroeconomic backgrounds. Additionally, because of particular characteristics that differ from those of benchmark indices, thematic strategies can play a diversification role in portfolios. 

With technological and social change happening at ever-faster speed, and environmental considerations gaining precedence, thematic indices will continue to attract investors’ attention. 

^[1] See Wellington Management, “Thematic investing: Long-term thinking for a short-term world,” November 2022.

We sat down with Omar Moufti, Thematics and Sectors Product Specialist for iShares EMEA, to ask him what’s driving demand for essential metals, and how iShares ETFs achieve exposure to this long-term theme. 

_{Omar Moufti, iShares}

Omar, what is the investment proposition with metals?
“From a broad and macroeconomic perspective, one of the key reasons we see investors seeking to allocate to metals is for exposure to real assets in an inflationary environment. The market events over the last few years have put the broad portfolio approach into context, and have pushed investors to refocus attention on diversification and portfolio resilience to various outcomes. This has brought commodity-linked equities to the fore. 

But another reason, more specific to the exposures themselves, is to express bullish longer-term views on metals and the companies that produce them. The mining segment has seen multiple years of underinvestment. In 2022, for instance, exploration budgets remained over 35% below the 2012 peak, despite metals pricing surpassing the peaks from those years.^[1]

It would seem that the prior cycle of overinvestment and low metals prices that followed, as well as current global macro uncertainty, are keeping miners cautious of investing. So if the forecasted demand for metal increases, the limited potential for supply to follow suit paints a constructive backdrop for metal prices, and thus miners.”^[2]

And more specifically, what’s going on with essential metals such as copper and lithium? 
“Besides the broader industry backdrop, there are particular and important drivers for so-called essential metals, drivers linked to the transition to a low-carbon economy: moving from a world centered on the combustion of carbon-emitting energy sources to a world characterized by deep electrification. Both copper and lithium are at the center of the structural demand shift we are seeing on three fronts: renewable energies, transportation and their related infrastructure.

The renewable energy space is generating historic tailwinds for copper and lithium. These metals are used in solar panels, wind turbines and for the electrical grid expansion required to accommodate more renewables, as well as the batteries required to store the electricity.

The uptake in electric vehicles (EV) is another key part of the story. An EV requires 2.5 times more copper than a traditional car.^[3] And each EV charger adds another 0.7 kg. of copper — up to 8 kgs. for fast chargers.^[4] Similarly, lithium is a key component in electric batteries. The International Energy Agency (IEA) expects lithium demand to grow more than eight-fold between 2022 and 2040 in a net-zero scenario, the fastest increase among the primary transition-related metals.^[5] 

There is no guarantee that any forecasts made will come to pass.

All-in-all, we have a strong structural demand growth dynamic as the transition to a low-carbon economy will be metals and materials intensive.”

So, demand for essential metals is surging at a time of underinvestment in the industry?
“Correct. There are important constraints that have led, or could lead, to a large supply-demand gap. Besides the underinvestment in recent years, there are other factors such as long lead times for new lithium processing facilities, and limited copper deposits discoveries in recent years. These add further headwinds to potential supply.

Finally, the production of these metals is often concentrated in a handful of countries,^[6] putting significant global supply at risk in the event of local disruptions. Some analysts expect supply shortfalls in copper and lithium in the next decade, which could push prices higher.^[7]
This supply-demand imbalance and the key role the metals play in the future of our economy have driven some governments — such as the US, for instance — to place these metals on critical minerals lists, illustrating their strategic importance.”^[8]

Can you tell us a bit about the lithium and copper indices?
“The indices target companies generating significant revenues directly from the copper or lithium markets, respectively, and the companies that play a significant role in these industries. The strategies are focused on the targeted segment, as opposed to a broader metals and mining industry exposure. Still, they remain diversified: over 30 companies in the case of copper, or 60 companies in the case of lithium and batteries.”

What is the difference between investing in the actual metals producers as opposed to buying the commodities? 
“In some cases, financial investors can buy commodity derivatives, but managing such contracts can be operationally complex and returns can be eroded by the shape and shifts of commodity futures curves. On the other hand, buying miners’ stocks allows investors to indirectly benefit from the high or rising profitability of these companies derived from elevated or rising metal prices, and potentially from the companies’ improving efficiencies.” 

^[1] Source: S&P Global Commodity Insights cited in Reuters, “Squeezed mining companies face growth dilemma,” January 31, 2023. See also McKinsey, “Navigating a decade of challenges: Five winning initiatives for mining CEOs,” July 1, 2022.
^[2] S&P Global, “World copper deficit could hit record; demand seen doubling by 2035: S&P Global,” July 22, 2022.
^[3] IEA, “The Role of Critical Minerals in Clean Energy Transitions,” May 2021.
^[4] International Copper Alliance.
^[5] IEA Critical Minerals Demand Dataset, July 2023.
^[6] World Economic Forum, “This chart shows which countries produce the most Lithium,” January 5, 2023.
^[7] Reuters, “Energy transition faces metals gap unless investment rises, report finds,” July 20, 2023.
^[8] US Department of Energy, “What Are Critical Materials and Critical Minerals?” February 24, 2022.

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