Despite the impact of slowing rate of Chinese economic growth on resource equities for many investors, the gap between the potential investment opportunities in the global resources sector and low market expectations is at an all-time high, according to Baring Asset Management.

Despite the slowing rate of Chinese economic growth casting a shadow on resource equities for many investors, the gap between the potential investment opportunities in the global resources sector and low market expectations is at an all-time high, according to Baring Asset Management.

Barings believes that the corporate earnings outlook is on the rise and capital allocation has become much more effective as a result of improved company management.

Sector restructuring through joint ventures and mergers is also being driven by equity growth outside of the commodity cycle in sectors such as construction materials and chemicals, along with structural shifts in demand in sectors such as diamonds and timber.

“Resource equities are particularly attractive at present, even taking into account China’s slower growth. One of the key reasons for this outlook is that the factors underpinning performance are changing.  Resource equity performance has become less dependent on the cyclical nature of commodities, with returns increasingly being driven by improved capital allocation and restructuring within companies.  We see that, on this basis, valuations are compelling, with the gap between low market expectations and actual investment potential in the sector having reached attractive levels,” said Duncan Goodwin, head of global resources at Barings.

Goodwin said this had heightened the importance of a bottom-up approach to stock selection as well as a global, multi-sector approach providing a much greater scope for exploiting market inefficiencies.
 
“The current market means it is possible to identify areas of the market where business conditions are highly favourable. Sectors such as timber, diamonds, speciality chemicals and resources processing & distribution are generally more diversified and less reliant on commodity prices and Chinese economic growth.  As a result, they are of significant importance and represent about 30 per cent of Barings’ overall positioning,” Goodwin said.
 
“We are positive on timber demand resulting from a housing recovery in the US.  With capacity having reduced post the financial crisis, an inflection point in demand could see a similar recovery in pricing and sector earnings.  Within China, signs of increasing demand for precious stones such as diamonds are also stepping into the gaps left by slower growth, thus the nature of Chinese consumer demand is changing.  As a result of a broad strategy with access to a wide range of sectors, we believe we are well placed to take advantage of such changes,” he added.