ASIA MARKETS: Commodity Rally Spills Into Asian Resource Shares

By Myra P. Saefong

TOKYO (MarketWatch) -- A rally in commodity prices has fueled gains in Asia's resource stocks, but those stocks have yet to fully reflect investors' craving to pile money into commodities.

Investor interest in the commodities market has helped lift gold prices to record levels, silver near a 30-year high, and oil to its strongest levels in weeks in New York. Copper and tin trade around two-year peaks in London.

"Investors are focused on the short term, and that is just the short-term hot money which is driving precious metals and base metals higher," said Chintan Karnani, chief analyst at Insignia Consultants in New Delhi.

With commodity prices rising, some resource stocks saw impressive gains last month, but those gains pale in comparison to those seen in physical commodity prices.

"Retail investor participation in stock markets is not very high at the moment," said Karnani. "Once retail investor participation in [the] stock market increases, commodity-related stocks will catch up with commodities."

On Friday, commodity-related shares mostly higher in late morning trading. Shares Inpex Corp. (IPXHF) climbed 1.5% in Tokyo, as the Nikkei Stock Average added 0.9%. Sumitomo Metal Mining Co. (5713.TO) fell 0.2%, but for the month of September, its shares rose nearly 19%, while Inpex has climbed over 3%.

In Sydney, Newcrest Mining Ltd. (NCMGF) rose 0.9%, and BHP Billiton Ltd. (BHP) was 1.4% higher, with the S&P/ASX 200 up 0.2%. For September, Newcrest gained over 6%, while BHP rose 5%.

Trading was closed for holidays in Shanghai and Hong Kong, but for the month of September, Aluminum Corp. of China Ltd. (ACH) , also known as Chalco, added 18% and Cnooc Ltd. (CEO) was up 12%.

 
   In wider Asian trading, Seoul's Kopsi   rose 0.4%, and Taiwan's Taiex was nearly flat. 
 

Retail interest in the stock market will "climb once the third quarter growth numbers are out and they show that growth will continue in [the] fourth quarter also," said Karnani.

Pure plays

The real gains so far in commodity-related shares have been seen in "pure plays," which are more sensitive to risk that has been abundant in the market, said Chris Weston, an institutional dealer at IG Markets in Melbourne.

Among those are Sundance Resources Ltd. (SDL.AU), which was up over 70% for the month of September, Lynas Corp. (LYSDY) , Oz Minerals Ltd. [s: (OZMLF) and Murchison Metals (MMX.AU).

Some of the pure plays have had "sizeable outperformance versus underlying commodit[ies] and there is a lot of speculation about future earnings being priced into these names," said Weston.

Despite that, however, "resource stocks are still a good place to invest," he said.

When you look around the market at present, the materials space is "still the sector which is showing the most amount of earnings growth, and we have seen traders globally re-rate the chance of a double dip, with traders a month or so ago being far too pessimistic," Weston said.

With the U.S. Federal Reserve effectively back-stopping markets and this unwinding of negative pessimism, as well as a positive stance on Chinese growth, "we have seen good buying in commodities and resource names," he said.

And "as long as equity markets head higher and risk is still flowing through markets, this space should continue to outperform," he said.

Forward view

Looking further ahead, analysts offered a few words of caution for investors.

"Commodity-related stocks will catch up soon, but keep a close watch on China as it takes measures to cool the Chinese housing sector, and also keep a close watch [for] a possible yuan revaluation," Karnani said.

Julian Phillips, editor at GoldForecaster.com, said resource shares are "vulnerable to governmental interference" and corporate risks.

Given that, he said he would prefer investing in junior commodity and precious metals stocks "in jurisdictions where the whole economy is resource dependent and promise to perform well in hard times."

Despite those cautionary notes, however, he believes that "any commodities that will be used in Asia's growth are attractive."

For now, "you are watching discerning fund managers select shares carefully, but commodities with less restraint," he said.