Australian Equities

Hymns for the non-believer

16/06/2008

Martin Conlon

Martin Conlon

Head of Australian Equities

I can recommend the Kisschasy album, and the title serves as a more than apt summary of my views on the current commodities boom, however, the single “Opinions won’t keep you warm at night” is a salutary reminder that the daily moves in the stockmarket are hardly reinforcing the case for the sceptics at present. 

The case for the resource believers is reinforced constantly, as the chorus of bullish sentiment from the media, stockbrokers and resource company executives provides more than enough material for writing the tracklist of “Hymns for the Believer”. Competition for superlatives remains intense as “stronger for longer” is superceded by South Australian Premier, Mike Rann’s “100 year boom” and Oxiana chief executive Owen Hegarty’s, ”stronger forever”. However, bowing to popular choices, the opening tracks would undoubtedly include: 

  1. Stronger for Longer, and
  2. It’s Different this Time

 The gist of the “believers” arguments is similar, but the central tenet is a demand led argument. Confidence in this demand argument stems from a number of re-inforcing factors: 

  • Chinese Economic Growth. After an extended period of extremely strong GDP growth (having not fallen below 7% since 1991), growth momentum has increased the confidence amongst most of the financial community and the general public, that growth will continue unabated. The primary reason for expecting continued growth appears to be extrapolation, however, the scale of ongoing capital investment and the expectation that the current era is the “once in a lifetime” industrialisation of the world’s largest population base are associated explanations.
  • Decoupling. As the slowdown in western economies, particularly the United States, has challenged the traditional commodity price response (i.e. declines), the term “decoupling” has been coined. Met with rapid acceptance, this assumption centres around emerging market growth (particularly Chinese), being no longer dependent on developed market demand.
  • India. With the large population base of China being a major driver behind the story, the potential for India’s similarly large population to act as further stimulus for the demand story is logical.

On the supply side, similarly emotive arguments add further fuel for the Believers: 

  • Inability to secure new supply. Whilst arguments on “peak oil” have been around for decades (and yet to be realised), the inability to add supply quickly in many commodities due to infrastructure and labour supply bottlenecks has fuelled concerns over the ability to add supply in the longer term.

The ability for these arguments to elicit an enthusiastic reaction amongst a large number of investors is obvious. Like all “booms” and potential “bubbles”, the arguments are easily understood and embraced. The opposing case for sceptics is perhaps more complex.

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