You name it gold, silver, raw materials they are all continuing to accelerate at an ungodly pace. Why you may ask? Well it comes down to four fundamental reasons. Emerging economy growth, safe haven asset, technology and fear of geo-political risk.
Source: FactSet Economics
The chart above clearly illustrates the momentum of commodities which has almost tripled from 2003 and doubled the returns of the FTSE All-Share over the last 3 years. Consequently, oils, metals, basic resources and mining companies have all benefited from this trend. As we have previously mentioned, profit and sales revisions are good indicators of momentum. The mining sector continues to accelerate, however the real issue lies with market expectations.
Source: FactSet Estimates
Although the profit revisions are up more than 15% over the last 3 months, most mining companies have been downgraded over the last month. Why? Clearly analyst expectations are over optimistic and now they are trimming down estimates.
Outlook
In the mid to long term, basic resources will clearly benefit from the exponential growth in the emerging economies as well as the fostering of new technologies such as fuel. In the short-term it might be useful re-thinking positions and either take a neutral stance or tilt your portfolio towards defensives, particularly as the global economy balances between over–heating and geo-political risks.
M&A continues to be a major theme. However, we believe infrastructure plays will continue be the flavour of the year.
These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.