Mining investment showing signs of recovery

THE CONFERENCE CALLER: The RIU Sydney Resources Roundup conference was opened in style by Colonial First Sate Asset Management senior portfolio manager Dr Joanne Warner.

She opened her presentation with a slide of media headlines, which all spruiked the end of the resources sector as we know it.

“If you look at the headlines – and they are all too familiar – you might think it is all over for resources and this is the point of capitulation, Dr Warner said”

“But for those of you that have really good eyes – if you read down to the subtitles – you will see these headlines are all from April last year.”

 

Dr Warner acknowledged the mining sector has of late been battling through a period where doom and gloom has abounded.

“Yet if you actually look at the returns that we’ve had in the Australian market since then – whilst lagging other sectors – it really hasn’t been too shabby,” she said.

Dr Warner stood back from the macro-environment of the Australian market to look at the mining sector in a global perspective.

In the past year, she explained, global mining stocks – in Australian dollar terms – are up around eleven per cent, and global energy stocks are up 30 per cent.

“This is a cyclical sector and generally the best time to invest is when everybody hates it, but you must do so with patience and you must do so very selectively, ensuring the companies that you invest in will be able to withstand an extended period of tough times,” she said.

One way of looking at the current situation for retail investors is to look at how an institutional investor may weigh up investing in the mining sector versus all their other choices.

The brutal reality to be faced by the strutting suits of the Australian financial sector is that it is not the Australian institutions who always own resources, or the mums and dads.

These are not the investor who make our market go up, instead it is the global marginal buyer, or the global marginal seller, that creates the pressure on share prices, or can create positive momentum.

“Generally to get enough buying power we are talking about the big global institutions,” Dr Warner said.

If these are the people more responsible for the fluctuations of our local market, what do they think about resources at this point in time?

A quick look at recent history – we only have to go back as far as the beginning of 2013 – the metals and mining sector is not exactly in poll position, rather more towards the rear of the field.

It is of little wonder then, market followers tend to take as gospel the headlines of capitulation from April last year, Dr Warner displayed at the start of her presentation.

“Apart from a negative blip in June last year, which corresponded to the first warning shot in China at the credit markets that created a bit of a shakeup in global equity markets, the sector – in US Dollar terms has actually traded sideways – not down, but sideways,” Dr Warner explained.

“Definitely lagging the other sectors and not something that is flashing at the top of your screen saying ‘must buy now!’

“But, at least it didn’t go down and that is refreshing after several years of negative returns.

This all begs the question then of where, if not in mining, are these global institutions investing their money?

Dr Warner referenced a Merrill Lynch, where it asks portfolio managers around the world where they consider themselves to be either overweight or underweight in a particular sector

As it turns out, the majority of portfolio managers – at present – are overweight in bank, discretionary, and industrial stocks.

The reason for this, Dr Warner said, is because they’re the stocks that are the best performers – part of the reason for this is that they are considered to be the most defensive equities.

“If you’re a portfolio manager – and a year ago you had very high weightings to cash and extremely defensive sectors – you were starting to feel like you needed to put a little bit more of that money to work in the equity market, but you’re feeling very cautious – so you go for defensive investments,” Dr Warner explained.

“Investments where you may be getting a dividend yield where they look like they have value to support them.

“Those are the sectors that have benefitted from the inflows back into the equity sector.”

No surprise then that the mining sector is feeling a bit unloved and lagging behind other sectors.

What is interesting is the unloved and least fashionable positions in a global portfolio manager’s asset allocation of materials, commodities, and energy are now developing as the emerging markets

“The earnings per share for mining companies has fallen as too have the share prices, that’s of no surprise,” Dr Warner said.

“In the past three years or so, in the global equity market – as money has started coming back into equities, particularly these defensive sectors – we have seen share prices going up but the earnings per share has not been rising to support those valuations.

“We are at a point now where people are paying a lot of money for insurance – they’re still feeling comfortable owning investments they feel are safe, but they are paying a real premium for that comfort.

“Ironically, we have got the point now – in mining – where the earnings are falling faster than the share prices and you actually get a better dividend deal from the miners than you do from the broader, global equity market.

“That’s a pretty amazing statistic.”