UBS Global Asset Management (UBSGAM) is warning that a price bubble may be forming in the small cap resources market.
“We are concerned about the overvaluation in resource stocks,” UBS Australian Small Companies Fund portfolio manager John Campbell said in Sydney yesterday.
“We have tried to protect the portfolio from what we think are very overvalued resource companies.
“We just look upon it as extremely expensive and so hopefully our portfolio, if and when this stuff starts to crack and commodity prices start to tip over, will be quite well insulated from the effects.”
Small cap resources are trading at a price/earnings ratio of about 17 times, the same level they were back in mid-2007 before crashing to five a year later, according to UBSGAM.
Fifteen of the 20 top performing stocks in the Small Ordinaries Index last year were resources companies with negative earnings.
“They are losing money and they are promising that they are going to make lots of money once they get their projects funded and up and running,” UBSGAM portfolio manager Jeremy Bendeich said.
“And people are buying those companies on the promise that their projects will be highly successful, on time and on budget and the resource turns out to be what they claim it is.
“You are talking up a bit of a resource bubble.”
The UBS Australian Small Companies Fund prefers companies in the mining services, industrial, and information technology sectors as well as select retailers.
“We actually have quite a degree of exposure to mining contractors which are primarily driven by the tonnes mined in Australia, they are not driven by whether copper is $4 or $2,” Campbell said.
“We don’t have an apocalyptic vision of the world that we’re going back into global financial crisis and economic growth is going to collapse, we’re actually quite upbeat and positive, we just feel that commodity prices have run way too hard and will come back.”
