Earnings and profits growth for resource companies have recovered in recent months after failing to ...
Earnings and profits growth for resource companies have recovered in recent months after failing to meet investor expectations in 1999 and the first half of 2000, according to Neil Robson, head of European Equities at Baring Asset management.
Resource companies posted an increase in total returns for the six months to the end of May 2001. For example, the Bloomberg Paper and Forest Index increased only 3% in sterling terms for the 12 months ending 31 May 2000 against a 25% rise in the overall Bloomberg 500 index. Over the 12 months to end of May 2001, the Paper and Forest index has risen by some 30% against an overall market drop of 15%.
Robson says publishing companies have been running down their inventories recently and there has been a slacker demand as a result, leading paper companies to shut down production. Companies that now have low inventories will be forced to purchase stock, which will push up prices, he says.
Robson predicts a return to more normal conditions for resource companies in the near term, which should see them return to more realistic prices. He sees paper companies as having relatively strong potential over the next few months and has recently bought the Finnish Stora Enso.
The weakness of the euro against the dollar is another factor that has helped resource companies, according to John Hatherly, head of global analysis at M&G. The cheap euro has meant the sector is very competitive and remains a good area of growth, particularly for diversified companies, Hatherly says.
Alex Tarver, senior fund analyst at Fidelity, says: 'Prices in this sector fluctuate a lot as they are dependent on the price of raw materials and often on political decisions.'
Aluminium manufacturers are an example of companies benefiting from external forces.
In California, where 10% of the world's aluminium production is based, the energy crisis has slowed production. Half of California's production has closed down as electricity has become unaffordable. This constraint on supply has led to increased prices and has also benefited European-based companies.
Billiton, which specialises in the exploration, production and marketing of aluminium products, is up 42.64% in sterling terms for the year to 12 June. Its performance has boosted the entire sector, making the Bloomberg Metal and Mining index the second best performer for the year to 12 June.
Robson points out that steel, paper and most metal manufacturers are also producing less.
Hatherly says control over supply is a key reason for the strength of the sector. 'Recent merger and acquisition action has given the companies much more control over prices,' he adds.
Hatherly cites oil companies as continuing to offer good value as prices have also been kept high, with Opec maintaining a disciplined approach to production levels.
He favours companies like TotalFinaElf, currently on a P/E of 17.52 times and priced at E172.6. He also favours the Italian oil and gas company ENI and the Norwegian Statoil, which will soon come to market.
Resources cheap after revaluations.
Demand to increase leading to price hikes.
Weak euro makes firms competitive.
Senior Managers Regime
Interest rate outlook unchaged
FCA made demands last week
'Unsung' part of FSCS work