Press Release: Leaving the greater risks to the Olympians
The Winter Olympics are always fun to watch, particularly for the many peculiar sports that we rarely get to see outside of the games. The frantic brushing of the ice with those odd little brooms only makes sense to the Curling players and you have to be a Snowboarder to understand â€œpulling a gnarly 720 while riding the half-pipe goofy footâ€. For the 2600 athletes vying for the 84 gold medals on offer at Turino, the Olympics is a serious business. You have to be serious when youâ€™re hurtling down the luge on your back at 140km/h or flying headfirst down the hill in the skeleton. The ski jump also calls for something of a serious approach. One canâ€™t be too nonchalant when flying over 100 metres through the air and then trying to touch down in a graceful, bone-saving manner.
Looking at the profile of the large hill ski jump at Pragelato, one can identify an uncanny resemblance to the graph of the Resources 20 index over the course of February. From a sharp peak just short of 36,000 at the start of the month, the index plummeted 13,5% over the space of a fortnight to just below the 31,000 level. On 17 February the reported offer for Lonmin sent resources stocks screaming higher again and the index rose to almost 33,000 in a single day to complete the final lip of the ski jump. This market volatility and the gyrations of the resources stocks in particular are as bone-jarring to investors as the mogul run appears to be to the downhill skiers on TV.
This volatility together with the unpredictability of commodities prices and currencies must explain why many local asset managers have been underweight resources while the sector has outperformed. Much was made of the fact that last year only a handful of general equity unit trusts managed to beat the All-Share index. That situation is likely to repeat itself should resources outperform again this year because fund managers appear to still be underweight resources and overweight industrials and financials. The answer to why this is the case must lie in the greater unpredictability of the variables underlying resource company earnings as well as the fact that two resources stocks, Anglo and BHP Billiton, make up almost 19% of the All-Share index. Not many fund managers are likely to build an investment portfolio where just two counters make up almost a fifth of the portfolio.
The strong level of global physical demand has indeed driven up commodities prices but on top of that, a heightened level of investment and speculative demand has added a certain amount of â€œfrothâ€ to prices. Unless you remain optimistic that commodities prices will continue ever upwards, itâ€™s nigh impossible to predict when speculators will withdraw their funds, move to the next best investment opportunity and clear some of that froth. Of course you always need a longer-term view on prices when valuing a company but do you extrapolate spot prices out a year or two or do you try and predict when the music will end and the froth will dissipate?
When considering the local industrial and financial counters it is much more apparent how the underlying business and economic fundamentals are likely to affect corporate earnings. There are no certainties in valuations and assumptions still need to be made but perhaps itâ€™s easier to identify or quantify the value in the industrial and financial counters. Slalom racers may need to take big risks to win gold but asset managers would rather overweight the less risky, higher probability outcomes, than the riskier, more uncertain ones.
Craig Pheiffer, Chief Investment Strategist
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