Barclays is feeling pretty positive about the possibilities diamonds are offering investors.
With the tide turning when it comes to Chinese growth, a strong dollar and worries over the health of emerging market economies, diamond demand is resurging, it says.
Demand growth for diamonds arrives relatively late in an economic cycle, post job creation and as house pricing, consumer confidence and spending increases – see US, Japan, Europe.
The slowing Chinese economy has seen a shift from investment-led to consumer-led growth in the country: a burgeoning middle class are interested in precious things on clothes and accessories, not just those that are traditional safe-havens.
China’s demand for diamonds has grown 29 per cent since 2005 – with GDP now approaching $10,000 per capita, there’s “a strong argument that demand remains powerful”. Barclays also points out that China’s “flexing its muscles”, upping the volume of cutting, polishing and financing it's doing.
US consumers are also buying more of the valuable gems, as the Fed’s tapering – and, as importantly, the reasons for it – buoy the dollar.
The risk of shocks to supply are diminishing, says Barclays, but it still remains constrained. Equity is scanty, and companies are running tight ships in what’s a highly-consolidated industry – the investment bank's expecting imminent and significant rises in cash flow and earnings for several firms. Management in the sector, it stresses, are becoming more and more focused on returns.
As such, it’s initiating coverage on four stocks, including Petra Diamonds which, it says, is “a cut above the rest”. Gem Diamonds, Alrosa and Dominion Diamonds will also be covered. The investment bank’s most negative on Alrosa, but says all are appealing as they’re trading at a discount to net present value. It rates Petra and Gem as overweight, giving the other two companies an equalweight rating.