Resource stocks may get their due - Commodities rally expected
to continue and possibly kickstart the sector
The Globe & Mail, December 16
GUY DIXON, Investment Reporter
Investors may want to think again if they expect the surge in commodity
prices to end soon and resource stocks to suffer.
One Bay Street strategist argues that with North American economic
growth showing no sign of abating, resource prices could remain strong
and possibly kick start resource stocks.
George Vasic, strategist and chief economist at investment dealer
Warburg Dillon Read in Toronto, noted that the lagging performance of
resource stocks relative to the overall stock market could improve as
the economy enters another year of strong growth.
Resource stocks, in short, may not be getting their due in the market,
given that the economy seems to be firing on all cylinders going into
2000.
"Resource stocks have lagged the rally in commodity prices, and
notably have declined in recent months, while commodity prices have
kept on going up," Mr. Vasic said in a report this week.
Global economic growth is expected to stay strong, he added, "with
upward revisions likely in store for the new year."
The consensus forecast, for instance, of 3.1-per-cent growth in the
United States next year would entail quarterly growth of only 2.5 per
cent, Mr. Vasic noted.
Given the fact that many of the conditions that have pushed U.S.
growth to around 4 per cent since 1996 are still going strong, there is a
chance that the growth numbers could be revised higher. Warburg
Dillon Read's predictions are for 3.9-per-cent U.S. growth next year.
"We believe that global growth estimates . . . will be revised up, causing
investors to defer their expectations of a slowdown to 2001," Mr.
Vasic noted. "Accordingly, resource stocks should experience a
reverse reality check and catch up to commodity prices."
Inevitably, though, there are other factors at work.
The huge runup in shares of communications equipment maker Nortel
Networks Corp. and telecommunications giant BCE Inc. has diverted a
great deal of money away from commodity stocks and other sectors.
These two companies' mammoth 26-per-cent weighting in the Toronto
Stock Exchange 300-stock composite index is far above the combined
19-per-cent weighting of four commodity subindexes -- the TSE's
metals and minerals index, paper and forest products, gold and
precious minerals and oil and gas.
"So whenever BCE and Nortel rise 2 per cent on a given day, investors
have to sell the equivalent of 2 per cent in market capitalization in these
four sectors, for example, to keep up with the index," said Martin
Roberge, a quantitative strategist at National Bank Financial in Montreal. |
