Morgan Stanley are out with a report on the commodity cycle and Australian miners are they are bullish.
As the Mining Index deterioration accelerates, we are focused on the 2016 horizon and the recovery implied by the cyclical nature of the group. Undoubtedly, some miners face difficulties as volumes need to be taken out of the market to balance the supply-demand relationship, but those that work through the cycle will likely be viewed as ‘cheap’ in hindsight.
Using foresight to say that with hindsight miners will look cheap discounts a lot of information and expectation into current and future price expectations. But the analysts at Morgan Stanley say that mining equities “have already priced in the spot commodity prices (or something lower),” as the chart below of the performance of the ASX Minerals and Mining Index versus the ASX 200 suggests.
They argue that with the price to book ratio for the miners, which is below the 2008 (GFC) year-end level, the sector offers value, “even if subsequent write-downs are taken”.
Fueling that belief is also a strong feeling that prices are at or near their lows for a number of commodities:
With prices having fallen, the potential for further declines is reduced. In fact, we see most commodities as being around the cyclical lows. The duration of the trough for each commodity will likely be determined by specific market dynamics. But broadly speaking, we think this can be viewed as a period of opportunity to begin increasing sector exposure.
The market looks set to open stronger this morning after a strong rally in futures trade Friday. This report can add further support to the beleaguered miners.