COMMENTARY — Figuring out the market

Analyst David Williamson in London ponders the ups and downs of the market in a recent edition of his “International Mining Review” newsletter:

Recently, I have been focusing on the values that the market has been placing on mining equities, stressing how certain shares without defined fundamentals (but much hope) have soared in price while other companies, with seemingly good assets, languished or drifted lower. One company I know of doubled its ore reserves and yet the share price went down!

It reminds me of my early days in the stock market when I was told several things which were common knowledge to all in the analytical profession. The first, and most important, was that a good analyst would always foresee a situation well in advance of it becoming apparent to the market. This was told to me by the firm’s senior partner who was then sustaining a large loss on one of my earliest recommendations. He declined to double up, but did eventually make a good run.

Running contrary to this, I was told that the market was always right, as it summarized all knowledge in the market place and reflected this in the share price. Frequently then, and subsequently, I have labored to inform the market of what I thought to be right, all to no avail. I continue to find it puzzling, to say the least.

Furthermore, my learned colleagues would also tell me, normally when I misread the market, that not only did the market know best, but it looked a long way ahead, and really it was better to travel than arrive. Armed with such knowledge, my career as a mining analyst improved.

However, I again find myself puzzled as I try and work out which way the markets are going to jump in the next year or so. Clearly, something awful is about to happen as all the economic news we are currently hearing is good. After all, the U.S. economy is charging ahead and is now being joined by Japan and Germany for the first time in years.

Inflation is low and there are few evident signs of overheating just yet, although commodity prices are on the rise. Added to this is the fact that growth in China, India and the Far Eastern nations continues apace. The prospects for China alone could make it the world’s largest economy in the not too distant future.

As for the mining sector, Latin America and Africa are now open for exploration and development for the first time in decades. Yet, world equity markets are now hesitating in uncertain trading conditions as investors try to work out what 1995 will bring.