The outlook is turning more positive for resource stocks which have so far this year underperformed ...
The outlook is turning more positive for resource stocks which have so far this year underperformed the rest of the UK market.
The realisation of the internet's impact on traditional businesses has been demonstrated in the stock market this year in the feeding frenzy for "new economy" businesses.
Traditional industries - including resources - have been significantly derated. So far the mining group has fallen 26% below the All-Share's average P/E ratio of 27.9 times and oils are 40% down.
Margaret McLaren, investment director at Britannic Asset Management, says: "The fundamentals are very good for both groups in the UK but they have been sold down to raise money for buying technology, media and telecoms stocks.
"From here we are expecting them to outperform on a one-year view as most analysts are upgrading earnings estimates."
Apart from the earnings outlook, macroeconomics also support the investment case for resources.
Britannic has a slightly positive view on this sector as it expects global growth to remain strong, while interest rates are unlikely to rise fast enough to upset that growth.
Moreover, at these low valuations, the stocks are very cheap, which will eventually raise support for them. In fact, according to McLaren, oil stocks are beginning to move upwards again.
She says: "The selling off process is over. Interest rates are are close to peaking which will be a trigger for these stocks to outperform again.
"The downside risk has now disappeared and we are more biased towards buying rather than selling those stocks."
However, the future remains bleak for other resources such as basic industries, for example, steel, paper and chemicals, and forestry, where there is still worldwide overcapacity and pricing power remains negligible, adds McLaren.
At Baring Asset Management, the view is much more negative. Mark Latham, manager of Baring Global Resources, has taken the view that everything is, or will become, a commodity in the new economy.
For this reason, he now considers D-Rams (memory computer chips) to be a commodity in which his fund can invest.
He says: "We are in the business of investing in equities that produce unbranded, goods that can be valued by weight or measure. Whether that is oil, gold, D-Rams or plastics is immaterial.
"We are instigating a research project to identify marketplaces in non-traditional resources which are traded and we can track prices.
Through this process, more and more products will come into our universe of opportunity.
"This will radically differentiate us from our competitors but the aim is simply to improve returns, which in absolute terms, have been and in our view remain likely to be derisory."
Latham holds some contrarian views, particularly on inflation, which he argues may not have peaked, and on the outlook for global growth, which he thinks may have already seen its cyclical upturn.
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