UH-OH. “They” have come up with another quick reference nmemonic. Remember how dot-com starlets were labelled TMTs because most came from technology, media and telecoms sectors? In the same way we now have MEIs – shares in “materials, energy and industrials” companies currently enjoying an energetic, if not foolhardy, investment following.

It is not a good sign, made all the more ominous that muck-and-brass mining companies have been rebranded as “materials” plays. It is also more than a little ironic, since the MEIs – disparagingly known as “old economy” stocks at the turn of the millennium – inhabited the flip side of the dot-com boom.

There is a perfectly respectable, if deliberately iconoclastic, school of thought that the best of any investment story is past as soon as the group is sufficiently well recognised to merit its own little nickname. After all, investment capital, like iron filings to a magnet, is attracted to assets offering high returns. Yet, once an asset is swamped by capital it almost inevitably follows that returns will be diluted. In extreme cases torrents of liquidity can destabilise, or fundamentally undermine, the investment prospects of the finest ideas.

Recent merger and acquisition activity fuels fears that a dangerous bubble is inflating around the “materials” division of the MEI grouping. The $38 billion being shelled out by the London-listed Rio Tinto for Alcan, the Canadian aluminium producer, makes it one of the largest deals of its kind ever seen. At $101 a share, Rio is paying 21.3 times the after-tax earnings recorded by Alcan in 2006. That is a heady price by any standards: Rio shares sit on a price earnings ratio of 12.8. It is justified, in part, by the cost savings Rio expects to extract but it may rely too heavily on the assumption that aluminium prices will continue to increase. They may have to rise farther than the 16 per cent recorded by Alcan most recently.

Strong worldwide demand for aluminium, and other metals, is feeding confidence that the notoriously cyclical mining sector will continue to deliver handsome returns to investors. Some believe that demand for metals – and energy – from the industrial revolutions in China and India means MEI sectors may have lost their propensity for cyclicality. Others think there is a super cycle in which prices will stay “stronger for longer”. The trouble, however, is that prices could weaken whether or not demand remains robust.

If China and India hit choppy economic waters, mining and energy companies will suffer as commodity prices sag. In any event operating costs are rising, reducing the profit in high commodity prices. But if prices remain high, mining companies will have an incentive to open new mines and give the world more metal. The heavy capital investment required to open new operations, meanwhile, means that mines will not just be shut. As supply rises, prices may fall, even if demand stays strong.

Mining shares listed in London have galloped ahead in the past five years. A £1,000 sum invested in the FTSE mining index is worth £4,500 now, well ahead of the equivalent £2,000 for the FTSE all-share index. Price-earnings ratios for the leading four – Rio Tinto, Anglo American, BHP Billiton and Xstrata – vary between 12 and 14, according to data crunched by Hemscott, the stock market information specialist. This is not too stretched, but there is precious little in the way of support from dividend yield. Xstrata pays on 0.67 per cent, while the other three are all less than 2 per cent. These dividends are well covered by earnings – four or five times in the case of Rio Anglo and BHP and 13 times at Xstrata. If earnings do slide, however, this may be much needed to secure dividend payments. Investment bubbles often inflate well past the point of no return so there may be upside left in mining shares. They are riding for a fall, however. Sell sometime soon.