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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (5626)	12/15/2005 8:45:05 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Can resources cycle be maintained? Market commentator Richard Simpson on the oil price, gold and the risks of investing in resources. Our market commentator tonight is Richard Simpson at RMB Asset Management. Richard, I’m looking at some trepidation at the oil price. Crude oil is about $58 a barrel and it is the one thing that gets the reserve bank a little cautious about inflation. Richard Simpson: Absolutely. And one of the incredible things about the oil price over the last five or six years is that it’s moved form $9 per barrel to close to $70. And yet the world has escaped with relatively little inflationary pressure. So you know, we’re back to $58 and we’re having a bit of a cold spell in Europe and the US. We’ve seen gas prices shoot up aggressively over the last couple of days which is a bit concerning. Oil is following. Can oil test the highs we saw a couple of months ago? Bear in mind that the world is quite an efficient place, and the highest cost production of oil reserves around the world $46 a barrel. Bruce Whitfield: That’s deeply inefficient production. Richard Simpson: Very, and very difficult to extract. If we have a sustained oil price at these sort of levels, it’s just a matter of time before we get this type of resource coming to the market. So it’s difficult to envision a sustained price of $70 and above over a five or six year period. The world doesn’t suffer from a lack of oil. It’s really a question of balancing a shortage of supply with very strong demand at the moment. That comes back to our earlier point about strong liquidity conditions coupled with a demand out of China. Now the powerful demand that we’ve seen for oil and other commodities won’t be there forever and it will even out these phenomenally high oil prices we’re seeing. Bruce Whitfield: So it’s a short-term problem perhaps, but it is a short-term problem that our Reserve Bank has to deal with. There are those secondary effects of inflation. Tito Mboweni was saying last week that oil prices are a problem, and at the end of the MPC meeting he said the MPC will be vigilant and keep and eye on all international factors that might cause them to change their monetary policy stance. Richard Simpson: Absolutely. Remember, there’re always caveats. And at the same time of the MPC meeting the Rand was quite a lot weaker than it is now. Bruce Whitfield: Sure Richard Simpson: The rand is back to $6.29. That could weather a bit of strength in the oil price as well. So we’ve got to look at the whole picture. In the short term, a spike in oil prices is a concern. Bruce Whitfield: Spiking oil prices are scary but the rand is on our side. One of the reasons why the rand is as strong as it is, R6.26 to the dollar, R11.08 to the pound and R7.50 to the euro is because the gold price is as strong as it is. Earlier we were talking about the fact that the gold price is a little uncertain at the moment. But if there is a drop in the gold price, it could cause the rand to weaken. If the rand weakens and the oil price stays high, we could have a little bit of an inflationary concern. Richard Simpson: But the rand price of many input costs in this country such as steel, oil and food, to a degree, are all a function of both the dollar price and the strength of the currency. And they’ve all had phenomenal moves, which is already a base for inflation. So obviously one must always keep an eye out, but one must also be aware of the base effect. It has already been established in the rand price of oil which is up several hundred percent since a couple of years ago. Bruce Whitfield: All of this takes us to an outlook for 2006. It’s quite a difficult call to make, because here we’ve got a JSE which yesterday hit record highs of 17 500. It’s been breaking records almost monthly. Nobody expected the resources cycle to remain as strong as it has this year, but it did. Now we’ve got to make a call into 2006 and ask whether the resources cycle can be maintained. If you have a portfolio should you have greater weighting towards resources as opposed to other sectors? Richard Simpson: Let’s look at resources. There is a bit of a conundrum. In your favour for resources at the moment are the strong moves we’re seeing in underlying commodities, whether it be oil, platinum or gold. So earnings momentum us going to be in your favour for the bulk of next year. On the flip side though, is if you look at their valuations relative to the financial sector, they’re about 40 percent more expensive. So you buy into a sector which is about 40 percent more expensive than your typical financial or industrial company, added to the fact you’re buying resource companies with pretty high profit margins. So any faltering in the underlying commodities as we go into next year — and some of the demand we’ve enjoyed may falter — means the risks are mounting. Bruce Whitfield: The risks in resources are mounting. You’re suggesting the valuations in the financials and industrials look a little more attractive and perhaps if you’re looking at a capital preservation strategy in 2006, that may be the safer place to be. Richard Simpson: Quite right. The dividend yields in that sector are equally as favourable in many cases. Bruce Whitfield: Richard Simpson at RMB Asset Management, thank you for your views this evening. business.iafrica.com