When will the climate improve for resources investors?

CONFERENCE CALLER: The opening day of the Gold Coast Resources Showcase was greeted by an ominously overcast Queensland sky.

As the weather reflected the current downcast mood of the Australian investment market, Lime Street Capital managing director Stephen Bartrop opened the conference by stating the market, in particular the resources sector is currently in an oversold situation.

Taking a look at the current state of the market, Bartrop indicated that the month of June is usually a time of pre-tax loss selling and that presently we are probably seeing the bottom of the market cycle.

Resource equities typically perform stronger in the September to March period each year.

According to Bartrop, by buying broader-based resources at the moment – particularly the larger companies – you are likely to see some recovery over the next six months.

That’s not to say there is no life in companies operating in the crowded space in the smaller end of town.

The recent belting of these stocks has seen many good companies with good projects and management capable of delivering project finance and milestones falling into the very-affordable realm.

This area has the potential to be where the real money is to be made within a one to two year time frame where you pick the right stocks.

The right stocks, of course being the ones that survive as opposed to those that are destined to hit the wall.

Bartrop suggested there could be an early recovery story to been told soon, but medium-term a few important things need to happen, one of which is a re-basing of the Aussie dollar.

 

“The marginal investor is overseas and the Australian dollar has fallen,” Bartrop said.

“We suspect it does need to fall to around 80 to 90 cents, maybe sit around the 85 cents range.

“It then needs to hold some stability for investors from overseas to then come back in, because at the moment they’re all nervous about – the share price may go up but the currency will erode any of those gains.”

Bartrop’s comments came the morning after the Australian dollar had fallen to its lowest value in 32 months of US93.47 cents.

He highlighted the need to discourage the flow of capital to the US, where growth projections are improving, which is resulting in the assumption the US dollar is going to appreciate.

“What we have seen is a much stronger dollar for a longer period of time relative to base metal prices,” he said.

“I would argue that…base metal prices at the sort of levels they are now, suggests the dollar probably should be around 85 cents.

“Overseas investors look at those sorts of charts and try to estimate to where they feel the dollar will fall – and then expect to see some stability.

“The Australian dollar really needs to fall in line with commodity prices to provide that confidence to the overseas investor.

“Once we achieve that is when we will start to get some true traction in our market.”