Volatility Creating Opportunity
Written on the 5 June 2009
Shares in companies involved in sectors with cyclical attributes, such as the resources sector, frequently display a high level of volatility, creating opportunities for investors.
INDEPENDENT researcher Stock Resource says shares can provide spectacular returns. But how do you select the winners?
Resource shares frequently display a higher level of volatility than industrials, due to the myriad of issues that can influence the performance of a company. Key issues include the upside from exploration discoveries, operational performance, the growth available through new development projects and the high earnings leverage to cyclical commodity prices. Global economic activity, as well as supply and demand issues drives commodity prices.
Stock Resource director Stephen Bartrop, says this presents equity investors with potential high rewards, but with a set of risk factors that need to be carefully considered. He believes that the bottom of the market has passed and the risks now depend on the timing of a recovery.
“This is not to say that there will be no further corrections to the recent rally that may have been too bullish given the economic backdrop, but we are unlikely to test previous lows late last year and earlier this year in both commodity and stock markets,” explains Bartrop.
“In fact there remains continued optimism by some authors that we remain in an extended bull market for commodities and we have just been experiencing a correction in a long-term uptrend.”
Bartrop, who is also the managing director of LimeStreet Capital and a director of the ASX listed Icon Resources Limited, says a salient point occurred in late April with the release of the International Monetary Fund (IMF) World Economic Outlook.
“The downgraded outlook potentially creates a scenario where the global economic outlook cannot look much worse – hence the market then assumes that all the bad news is factored in,” he says.
In its latest World Economic Outlook (published April 22), the IMF states that in the most severe recession since World War II, it forecasts the global economy to shrink by 1.3 per cent this year, with a slow recovery expected to take hold next year.
“Importantly, while the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to re-emerge in 2010, but at its 1.9 per cent forecast, this is deemed sluggish relative to past recoveries,” he says.
Stock Resources will present at the third annual Gold Coast Resources Showcase from June 11-12 at the Surfers Paradise Marriott Resort.
The Global IP Cycle
Supply of Commodities
Resource Company Fundamentals