The Current View
A lengthy downtrend in sector prices had given way to a relatively stable trajectory after mid 2013 similar to that experienced in the latter part of the 1990s and first few years of the 2000s.
The late 1990s and early 2000s was a period of macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable.
Relative stability suggests a chance for companies genuinely adding value through development success to see their share prices move higher. This was the experience in the late 1990s and early 2000s.
Still vulnerable cyclical conditions were aggravated in the second half of 2015 by a push from investors worldwide to reduce risk. Sector prices were pushed to a new cyclical low. These conditions were largely reversed through the first half of 2016 although sector prices have done little more than revert to mid-2015 levels.
With a median decline in prices of ASX-listed resources companies through the cycle of 89%(and 30% of companies suffering a decline of more then 95%), the majority of stocks remain prone to strong 'bottom of the cycle' leverage in response to even slight improvements in conditions.
Has Anything Changed?
A 1990s scenario remains the closest historical parallel although the strength of the US dollar exchange rate since mid 2014 has added an unusual weight to US dollar prices.
The first signs of cyclical stabilisation in sector equity prices have started to show. This has meant some very strong ‘bottom of the cycle’ gains.
Funding for project development may have passed its most difficult phase at the end of 2015 with signs of deals being done and evidence that capital is available for suitably structured transactions.
Key Outcomes in the Past Week
Market Breadth Statistics
The resources sector generally made strong gains in the past week, partially offsetting recent losses.
Weak oil prices continued to hinder US market momentum.
Oil sector pricing remained a product of the tug of war between OPEC producers and those in the USA, with the latter having expanded production to take advantage of higher prices coming from recent OPEC cutbacks.
Some stabilisation of prices occurred as talk of a more prolonged OPEC cutback circulated but the sector appears in danger of going lower without a more meaningful increase in demand.
Equity pricing at the upstream end of the oil market remained under pressure reflecting the oil market macro influences .
Equity markets globally pushed toward or remained at record levels. Within the U.S. equity market, technology and financial services have contributed dramatically to the market's strength with other sectors varying in importance.
Bank prices, which had benefited from higher bond yields as well as talk of deregulation, lost ground as yields fell somewhat in the past week and uncertainties persist about the extent of regulatory reform, particularly as it might affect the larger banks.
While the U.S. dollar remains at generally elevated levels, the currency moved lower during the week as doubts about the potency of the Trump effect on markets rose.
Health insurance reform was proving tougher than expected (with opposition from members of both major parties) with many concluding that, as a result, the administration may battle to achieve its other emblematic policies such as tax reform and business deregulation .
The weaker U.S. dollar assisted dollar denominated metal prices which had earlier shown signs of some momentum loss.
The combination of a weaker currency and some retracement in bond yields helped to sustain a moderately higher gold prices although the connection between gold and bond prices continues to suggest future precious metal weakness.
The precious metal complex generally showed improved price outcomes although there was some sense in the price action that the gains could have simply been a reluctant bounce after recent declines.
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The Steak or Sizzle? blog LINK contains additional commentary on the best performed stocks in the sector and the extent to which their investment outcomes are underpinned by a strong enough value proposition to sustain the gains.
