Smaller Mining Negative Raises Hopes

John Robertson

PortfolioDirect

The 15.6% decline in Australia’s small resources share price index in 2015 was its smallest decline since the rout in resource sector prices commenced in 2008. In a market characterised by extremes, the 2015 outcome was the smallest absolute percentage movement in the index in over a decade. Many in the industry will have been hoping for the sequence of negative price adjustments to have run their course. Optimistically, one might be tempted to infer that 2015 was a transition to more stable prices. There are reasons why this might be so: the need to sustain capacity and already historically low prices, for example. Equally, there are reasons why prices might have further to run. Among those reasons are inflated asset value expectations within the sector due, in part, to self-serving work by people with a vested interest in the outcomes of their valuation analysis. Unrealistically low discount rates and extrapolation of top of the market growth rates fall into this category. The chart shows the distribution of index returns since 1994 and the positioning of 2005-15 annual outcomes.


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John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...

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