Searching for Cycle Bottom

Despite a 20% rise this month, the small resources share price index – the best pricing indicator for the bulk of Australia’s listed resources companies – remains near the level at which it was trading 15 years ago. The seemingly strong return is indicative of leverage near the bottom of a cycle as the market attempts to establish a new pricing base. For many months, the PortfolioDirect investment commentary had been describing the likely price trajectory as potentially similar to what had happened in the 1990s – i.e. a multiyear period with positive but very low returns. That view had been put expecting (or perhaps hoping for) the market to stabilise at around the 2000 index level. Two factors required a change to that view: a strengthening US dollar dating from mid 2014 and a step down in global growth expectations. A comparison with the 1990s remains possibly even more valid now. Not only is a multiyear adjustment looking likely but the level at which it happens is proving nearly identical to the earlier cycle.