JPM's Gregson sees deep value in resources after 'torturous' year

Last year was a “long and torturous” one for investors, but there is now deep value in the heavily sold-off resources sectors, said J.P. Morgan’s Neil Gregson.

The manager of the £2.2bn Natural Resources fund and £4m Global Mining fund said there are several good reasons to be looking at these “beaten up” stocks, especially gold shares, at this point.

“It was a long and torturous year last year, but that is coming to an end. At the start of the year the general consensus was for an ongoing recovery in the US and Europe and slower growth in China, and equities were pricing that in. But of course through the year the Europe situation blew up, there were concerns about the Chinese property market, and there was the US debt issue,” he said.

“2009-2010 saw strong performance from small caps followed by a period of underperformance which was quite relentless. We kept a significant weighting in gold shares, but performance was pretty disappointing - the average gold stock underperformed ExxonMobil. But we think the whole sector has been beaten up so much that there is deep value there.

“I think we have seen the last of the underperformance of small caps. There has been some nice pickup in small-cap names in the past few weeks after relentless selling, so we expect to see some benefit from that.”

Gregson said although investors do not know what the world holds in terms of economic growth, there is plenty of valuation support for commodities on a medium-term view. As the consensus moves towards a recession in Europe, there is less room for disappointment, he added.

Supportive factors will include ongoing urbanisation in emerging markets, favourable supply and demand dynamics, and analyst downgrades pointing to a bottom for the sector.

“Investing at these levels, people are going to make some pretty good money,” he said. Favoured stocks in which Gregson sees the greatest upside potential include Australian iron ore and copper producer Fortesque Metals Group and First Quantum, where he sees scope for significant volume growth.

“First Quantum is a decent sized holding for us. It can triple its production from here, and we do not think that is priced in.”

Brazilian state oil company Petrobras is another stock where Gregson sees upside. “The stock has performed fairly poorly, and as with any state-owned enterprise, investors worry about ‘national service’.

"It does have its fair share of that, but the asset quality and the field it is developing are so good that it will have unparalleled production growth as a large-cap oil company,” he said.

“We have had a good couple of years of people being worried about capex and state involvement so we think it is priced in. It has not been producing free cashflow for a number of years, but for a longer-term investor, the stock is attractive at these prices. Production will be expanding from 260,000 tonnes to 1m in five years.

"On short-term multiples, Petrobras will not look cheap, more like a Rio Tinto, but you have to look ahead - say prices of copper and iron ore stay flat for several years, it will still have production growth.”