Martin Conlon, Head of Australian equities at Schroders has reiterated his bull case for resources: “For the most part, we still think that’s where the best value is in the market. Price to book and other measures, would all tell you there’s no way these things are expensive versus history.”
Commodities have been left behind by equities in recent years, to the extent that the ratio of the GSCI commodity index relative to the S&P500 is now at record lows. The chart below demonstrates this, as well as how cyclical the ratio can be, with previous lows, seen in the dot.com bubble or in the early 70’s, quickly reverting to historic means, and overshooting at times.
Speaking at Livewire Live, Martin Conlon discussed the cyclicality of the sector, as well as where we are in the current cycle. He enforced his point on the value present today, saying that:
“You are still buying the best resource companies at 1.5 to 2.0 times book value. There is no way that is super-expensive".
Watch this short clip from the afternoon of panels and presentations for the full story, and for his warning on bond proxy stocks:
The main argument against the sector has been commodity oversupply, not least with iron ore, however, the price of that still doubled. What is increasingly driving prices now is demand, and the sector is seeing improving tailwinds with demand supported by quietly improving economic conditions from key importers.
On the subject of small caps, Conlon argued that investors are moving down to the small end of the market ‘to get their risk’, leaving the opportunities at the big end relatively unappreciated. Posing the question of what would happen if BHP was broken into a suite of South 32’s, he told the audience:
"Like South 32, there’s more appetite for the smaller things. I guarantee that for the most part that if you broke up the conglomerates into smaller companies, most of them would go up."
More from Martin Conlon
To read Martin discuss with Livewire how 30 years of experience shapes how he invests today, please click here: (VIEW LINK)