Between A Rock And A Share Price
Sydney Morning Herald
Wednesday June 4, 2008
The resources boom shouldn't blind investors to other sectors.
The relentless rise and rise of Australian resource stocks is forcing investors to re-evaluate their portfolios. In particular, many shareholders may need to ponder whether they have become too dependent on financial stocks for their investment returns.According to a report from Craig James, the chief equities economist at Commonwealth Securities, the resources sector was drawing level with the financials sector last month for the first time in about 14 years - each representing a little more than a quarter of the total market - and was poised to overtake it. Illustrating the impact of this transformation, $10,000 invested in resource stocks in February 2003 would have grown to $54,000 by May 2008. In contrast, $10,000 invested in the broader market over the same period would have grown to only $26,700."Since the late 1990s, investors wishing to track the broad All Ordinaries or ASX 200 indeces have merely needed to maintain significant holdings of financial stocks, such as the major banks," James says. "In fact, just a year ago almost 40 per cent of the value of the sharemarket was represented by financial stocks. But with mining and energy shares in the ascendancy, investors have effectively got to re-do their sums."It is difficult to find market experts prepared to call an end, in the near term at least, to the resources boom. In contrast, some unease exists about the outlook for financials.Angus Geddes, the chief executive of Fat Prophets, says: "Our view is that financials will not do nearly as well over the next five years as they have done over the past 10. They will be battling a landscape of rising interest rates and rising inflation, which ... suits resource companies very well."Commodities prices tend to do very well in an inflationary environment. We may get some corrections in the resources sector but I am taking an overweight position. I believe it will continue to outperform."Nevertheless, good reasons exist for retaining a sizeable holding of financial stocks. James notes that resources tend to offer share price appreciation, or capital gain, rather than high dividend yields, whereas with banks there is more of a balance between dividend yields and the potential for capital gain. "Certainly we are of the view that the resource sector will continue to expand over the medium to longer term, riding on the back of China, so it does warrant consideration by investors," he says. As with any decision on shares, however, "it is not the case that every stock is going to do well. So it is a case of doing your homework. If you are trying to weight your portfolio in line with the broader market, clearly you would be putting 25 per cent to financials and 25 per cent to resources. "But having said that, each investor is going to be different and those older investors who are looking for yield rather than share price appreciation will have a higher weighting to financials than to resources."James Falkiner, the chief executive of Falkiner Global Investors, says the high dividend yield of financial stocks would make him hesitant about advising investors to start selling their financial shares in favour of resources. But he also warns long-term investors about the risks of becoming too dependent on either sector."You basically have a resources boom about once every 10 years," he says. "There was the Malcolm Fraser mining boom of 1979-80. There was the boom of 1989 and the early 1990s. And now we are having, for want of a better phrase, the Chinese urbanisation boom, although it is a bit more than just China, obviously. But I will tell you, it is really lean pickings in between. And that is what a lot of people forget. "The current resources boom could go on for quite a while. I still have a positive view on the long-term China urbanisation story. But we have not had a really solid correction in the resources stocks for a while. An inflation scare in China, or some other event that saw Chinese growth [tail off], would be enough to send copper back to $2.50 a pound and iron ore negotiations probably would not be so robust. And the resource stocks would be absolutely hammered."Equally, Falkiner notes financial stocks have not always performed well. "The reality is that up until about 1992 or 1993, when we got through the worst of the last recession, Australian banks for 10 years had been absolute dogs. People seem to forget they traded on price-to-earnings ratios of about eight."The only reason that things got a lot better for them was, in the first instance, the deregulatory phase that was started by Hawke and Keating in 1984. And second, inflation fell from its 1980 peak to a much lower level. "So what I would say is that neither of the sectors stacks up well against a really good-quality, long-term industrial growth company that has a solid franchise and that can just grow through the ages." For investors looking to increase their weighting in resource stocks, James says fundamental stocks for anyone's portfolio are the heavyweights - BHP Billiton, Rio Tinto and Woodside Petroleum. He says BHP and Rio are especially attractive for the extent of their diversification. "You are not taking a punt on one particular commodity, such as nickel or zinc." He says companies such as Oxiana and Zinifex will be the focus of attention for merger and takeover activity in the future. "We have already seen considerable consolidation in the mining sector and that is likely to continue," he says. "So there may be investors who will want to be looking at some stocks not just for their share price growth potential but also for the prospect of a takeover."Geddes also recommends BHP Billiton, Rio Tinto and Woodside Petroleum. In addition, he likes Oil Search, Platinum Australia, Cockatoo Coal and gold companies Avoca Resources and Lihir Gold.
© 2008 Sydney Morning Herald