The Big Picture
After recovering through 2010, a lengthy downtrend in sector prices between 2011 and 2015 gave way to a relatively stable trajectory 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 frequent macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable.
Relative stability in sector prices suggests a chance for individual 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 some 90 months after the cyclical peak in sector equity prices but these conditions were reversed through 2016 and 2017 although, for the most part, sector prices have done little more than revert to the 2013 levels which had once been regarded as cyclically weak.
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.
In the absence of a market force equivalent to the industrialisation of China, which precipitated an upward break in prices in the early 2000s, a moderate upward drift in sector equity prices over the medium term is likely to persist.
The Past Week
Equity prices finished the week pushing lower as the implications of an inverse yield curve played on fears of recession.
Market interest rates fell as the weakening global growth theme gained ascendancy. With the US Federal Reserve having been setting short term rates against a backdrop of a strong economy, the yield curve has been on a flattening trajectory and has been a talking point for some time as parts of the curve have occasionally flipped into negative numbers.
The impact of a yield curve inversion remains unclear. Certainly, recessions almost always follow a prolonged yield curve inversion. The lags, however, can be long and significant equity market gains can occur between the time of the initial yield curve change and the point at which economic conditions eventually force a fall in market prices.
A more rapid rise in the short end of the interest rate spread would normally occur because a central bank is trying to constrain activity to prevent higher inflation. As tightening near term monetary conditions imply lower growth in the future than had been anticipated, relative interest rate movements should not be surprising.
The recession outcome is not so much a direct result of a yield curve inversion as it is a reflection of the central bank pushing too hard on the monetary policy lever.
On this occasion, the US Federal Reserve has already stopped tightening, at least from an interest rate perspective. Its balance sheet measures will continue for a few months yet. Credit conditions remain consistent with an expanding US economy. Presumably, too, the Fed would respond quickly if the flow of data, such as short term labour market indicators, pointed to a rapid deterioration in conditions.
Since the change in the shape of the yield curve is now being driven by movements in longer dated securities, market adjustment to a future change in perceptions about growth outcomes could result in a rapid change in the shape of the curve without the central bank having to take any direct action.
Yield curve changes, on this occasion, may be reflecting a slowdown which has already occurred rather than foreshadowing something which might happen in the future.
A flattening yield curve can have a detrimental effect on bank lending but that is not something currently troubling US business which is more concerned about the slowdown around the world and uncertainties over trade as a result of the China-US trade dispute. A long promised favourable outcome to the dispute might be enough to change perceptions of where longer-term interest rates should set.
In any event, the pace of growth is hitting a ceiling around the world, whatever the China-US trade outcome, without fresh initiatives to spur productivity growth. Peak growth for the cycle appears to have occurred in late 2017.
Metal prices have remained surprisingly resilient in the face of the evident fears about slower global economic growth and US recession. Prices remain generally below where they had been in early 2018 suggesting that weaker conditions had been taken into account well before financial markets had turned attention to the growth outlook.
Financial and equity markets may now be catching up to the earlier warnings from within the metals markets. That would suggest the possibility of some sort of balance for the time being but only be on the proviso of no negative surprises on the growth front still to come.
The outlook looks increasingly reminiscent of the 1990s with potentially large risks tending to go unrealised as growth ebbs and flows within a relatively narrow range but without sufficient strength to result in strong lifts in raw material demand.
Sector Price Outcomes
52 Week Price Ranges
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.
Equity Market Conditions
Resource Sector Equities
Interest Rates
Exchange Rates
Commodity Prices Trends
Gold & Precious Metals
Nonferrous Metals
Bulk Commodities
Oil and Gas
Battery Metals
Uranium
