Psst, don't look now but we may be seeing the bottom of the cycle for ASX-listed small to medium resources companies.
The Chinese sharemarket this week hit a three month high, boosted by recent reforms announced by the government and an upcoming Central Economic working forum where details on reforms are likely.
The Shanghai Composite Index rose to 2,254 points. That said, the China stock market has been a chronic under-performer for some time although there are grounds for thinking the worst might be over.
There are also grounds for optimism on commodity prices from this sphere as well as the stronger economic data that has arrived from the U.S. this week.
U.S. Economy and Commodity prices
Companies boosted payrolls by 215,000 in November, topping the median 170,000 forecast of economists.
The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998.
Gross domestic product (GDP) rose at a 3.6% annualized rate, up from an initial estimate of 2.8% and the strongest since the first quarter of 2012.
New-home sales jumped more than 25 percent, the biggest one-month surge since May 1980.
Manufacturing in the U.S. unexpectedly sped up at the fastest pace in more than two years.
So while equity markets in the U.S. are falling as the realisation that tapering by the U.S. Fed will happen soon, the future looks brighter for the U.S. economy.
Which is why U.S. stocks are falling which will happen when they have been propped up and had a massive stimulant applied to the beast. In time, the U.S. economic growth will actually take up the slack left by the Fed's reduced bond buying.
The re-growth of the U.S. economy is an extremely positive for demand for commodities, particularly metals used in building and construction.
China plays big part
This week, local Chinese news agencies reported that President Xi Jinping said, “While the overall situation is good, the environment for economic and social development next year is not optimistic."
This is interpreted to mean that Xi might be looking to reduce economic growth expectations in 2014 to 7% rather than 7.5-7.6% per annum.
Also, that China growth is hampered by industrial overcapacity, prevalent in so many sectors from steel to factories. As well, the debts racked up by state owned enterprises will put a brake on ability to stimulate growth.
However, beneath all that is this inexorable fact: The United Nations forecasts that over the next two decades over 250 million Chinese will move into cities – roughly the equivalent of two Japans.
Even if the figure is half that and only 6 million a year move to urban areas each year instead of 12 million it is still a lot of demand for commodities.
That U.S. export demand could pick up would balance this effect.
What this means for Australian small cap explorers and resources companies
It means that the worst might well be over for metal prices. Share prices have fallen so far down across the landscape, it is tempting to think they couldn't fall any farther. Well they can...but the odds favour a rebound.
Which would lift small cap resources companies and a gradual improvement in the capital raising environment.
A generality to be sure, as iron ore is already a star and metals like zinc are likely to come into their own on supply side issues in the next two years.
We believe that the bottoming of small cap valuations on the ASX is occurring. Sure there have been false dawns before and to throw in another cliché, which in markets is often true - it is darkest before dawn.
POS Price at posting:
8.5¢ Sentiment: Hold Disclosure: Held
(20min delay)