Home' Forge : Vol 3 No 1 Contents wealth creator // 135
Even hardened contrarians
struggled to buy resource stocks
early last year. Weakening mining
investment, tumbling commodity
prices and terrible investor
sentiment crunched mining and
energy shares. Few believed that a
recovery was imminent.
Such is the way of bear markets.
Investors only hear bad news at the
end of long industry cycles, and
forget that it has been priced into
company valuations. They stop
looking forward, unable to believe
that a recovery is possible. Panicked,
they sell at the worst time.
That was the case with Australian
resource stocks in early 2016 –
the sector ’s nadir hit as fears
about China’s economy, and thus
commodities demand, intensified.
The S&P/ASX 300 Metals and
Mining index fell 70 per cent
peak to trough, from May 2008 to
Sector bellwethers were smashed.
BHP Billiton fell from almost $50
in 2008 to $15 last year. Rio Tinto
tanked from $153 to $39 over the
same period. Woodside Petroleum,
Santos, Newcrest Mining and
Fortescue Metals Group also
suffered large falls.
Junior miners fared even worse.
Unable to raise fresh equity capital
without heavy share-price dilution,
many went into hibernation. They
abandoned exploration programs,
deferred plant construction or
cut back on other investments to
The initial public offerings market
was dead for resource companies
during 2014–16. Nobody wanted to
invest in speculative resource floats
when even multibillion-dollar
miners were falling. Hardly any
resource companies listed.
Mining services companies were
dumped. After starring during
the mining boom’s halcyon days,
they felt the full brunt of the
sector ’s downturn first. Customers
were mothballing projects,
which decimated the earnings of
service companies that built or
Then, just as most investors
gave up on resource stocks, the
tide turned. Mining and energy
stocks started to rally in 2016 as
valuations hit rock bottom in the
first quarter. As so often happens,
a bull market was underway but
investors did not realise – or,
perhaps, believe – the gains.
Donald Trump’s win in the
November US election added
fuel to the resources rally. Some
commentators believed that gold
would benefit if Trump won, just
as the precious metal did after the
Brexit shock in June 2016.
But defensive assets such as gold
were sold off as investors rotated
into cyclical growth companies. The
market saw Trump’s policies, unclear
at the time, as pro-growth. Proposed
US tax cuts and infrastructure
spending were good for growth and
Led by iron ore and coal,
commodity prices rallied hard.
Base metals such as copper – often
a good predictor of future global
economic growth – leapt. Resource
bulls argued that the commodity
cycle was finally turning.
The market believed them. The
S&P/ASX 300 Metals and Mining
index soared 43 per cent from its
January 2016 low. The index’s 87
per cent total return (including
dividends) compared with 17 per
cent for the S&P/ASX 200 index over
the year to February 2016.
BHP and Rio Tinto almost doubled
from their 52-week lows. Mining
service stocks rallied sharply as
investors bet that the worst was over.
The IPO market started to open; six
miners successfully floated in 2016,
and at least 12 were lining up to
list on the ASX in the first quarter
of 2016 – the most in at least three
years. A rush of junior resource floats
this year is likely if commodity prices
and investor sentiment towards the
resource sector remain elevated.
Will the rally continue?
Few issues are more important for
the Australian sharemarket than
the sustainability of the resource
rally. Materials and energy stocks
account for 21 per cent of the ASX
200 index by market capitalisation.
Higher commodity prices mean
faster growth in resource company
earnings, higher company valuations
and a bigger tailwind behind
But the resource sector has plenty of
challenges. The Trump Presidency
adds to global economic uncertainty
and potential market volatility. If
his protectionist mantra is reflected
in policy, global trade – and thus
commodity demand and metals
prices – will suffer.
Emerging markets are another
concern. If Trump’s policies
stimulate economic growth, US
interest rates and the greenback
could rise faster than the market
expects, hurting emerging markets
and creating a headwind for global
Rising US interest rates could spark
a capital exodus from emerging
markets as investors look for
better yield in the United States.
Developing countries with high US
dollar–denominated debt, such as
Turkey, South Africa and Mexico, are
most vulnerable to higher US rates.
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