Resource retreat an opportunity

Resource shares are currently looking considerably more attractive after a 23% pull back on average since the end of June, says Mark Appleton, Chief Investment Officer at BJM Private Client services.

“Resources have substantially underperformed the industrial and financial sectors of late creating a buying opportunity,” says Appleton who argues that although there could still be some further price pressure on commodities, the price weakness of the resource shares appears been overdone. Investors should see this as an opportunity to add quality blue chip resources companies to their portfolio at valuations well below 10 times earnings.

BJM Private Client Services believes that the broader commodity super cycle is still intact notwithstanding the current cyclical downturn. “While current weakness in commodity prices can be attributed to a cyclical slow down, lower oil prices will result in more accommodating monetary policies which will have a positive impact on economic growth and ultimately commodities,” says Appleton.

Appleton says recent comments by the Chinese Bank authorities indicate that the period of monetary policy tightening is likely to come to an end. “The Chinese will start to follow a looser monetary policy in order to boost growth rates. Authorities do not appear to see inflation as a major threat going forward, choosing to focus rather on growth”. Appleton says a re-focus on growth within China combined with steady to lower interest rates globally will be positive for commodities.

“All of these occurrences are commodity friendly and bombed out valuations offer a good buying opportunity”. BJM Private Client Services’ top resource pick is Impala Platinum. Although the platinum price has fallen 30%, in line with the share price, Appleton says that the current lower platinum price is unlikely to persist.

“If these prices are to be maintained it would constrain future expansion plans creating a supply problem. This will ultimately be supportive of platinum prices”. Appleton says Implats, which is currently on a forward p:e in single digits, is a low cost producer allowing the company to be profitable at lower platinum prices. As an efficient producer they stand to benefit more from a tightening in platinum supply.