In March of this year, I doubled my exposure to BHP in my margin loan but I had no room to move in my super fund. As it turned out, I could have got a better price by waiting a little longer. However, I have still made about 10% on those purchases in nine months, plus a dividend payment.
In my June review [1] of the Mining sector, I continued to be optimistic about where this sector was going:
“Although there is little doubt that the mining boom is not what it was, it seems many investors are treating China as though its infrastructure spend is over. I think this part of the market has been very oversold.”
The sector since that June review has outperformed the broader index at 9.6% to 8.6%. But from Table 1, we can see that the three heavyweights – BHP, Rio Tinto and Fortescue Mining (BHP, RIO, FMG) – outperformed the Materials index. I did enjoy the 25.1% and 11.1% gains on RIO and BHP.
I owned (and own) Atlas Iron, Mount Gibson Iron, and Lynas (AGO, MGX and LYC). Two out of three ain’t bad! I was sorely tempted to add to my AGO and MGX exposure around June, but I concluded that would blow my risk position out – so I held tight.
The outlook
With 22 of the 28 stocks in Table 1 being in the red, will their fortunes change? I am still bullish on China, but few of the mining stocks have consensus recommendations better than 2.5. Only one stock, Sundance, has a better rating than either BHP or RIO so I am not tempted to go fishing down the list.
Mount Gibson has been downgraded from 2.6 to 3.0 over the last six months – possibly on the basis of its stellar run. While I think there is a bit more growth to go, I believe it is too late to join that party without taking too much risk on board. Atlas Iron is more interesting. While it too has been downgraded (from 2.2 to 2.9) it just announced a promising new find. It will be worth watching the progress of broker recommendations on this one.
Table 1: Data on companies in the ASX 200’s Mining sector
Note: the estimates in the Table are current to the close of business December 9, 2013. They are based on Thomson Reuters Datastream.Turning to the sector analysis in Table 2, a lot has changed over the last couple of weeks or so. No sector is currently overpriced, but that situation might not last long. The Materials sector is just in the lower half of expected unadjusted capital gains, but 15.3% (including mispricing adjustments) over the next 12 months would be nice if we can get it. Interestingly, banks did get a little oversold – after we called a correction in October – and so yield and gains are again attractive.
Table 2: ASX 200 sector statistics
Note: the estimates in the Figure are current to the close of business December 9, 2013.Sector specifics
The biggest change to my analysis over recent weeks is the building strength in the Industrials sector. My capital gains forecast has climbed about 4% over the last week – from 12% to 16% before the underpricing is factored in.
So with Christmas just around the corner, it turns out that my January 1, 2013 forecast for an end-of-year target of 5,150 shouldn’t be too far off – especially since the collective reported (AFR) wisdom of a dozen forecasters was for a gain of only 29 points in 12 months! So the 13.3% figure for the next two months for the ASX 200 in Table 2, with dividends of 4.7%, suggests 2014 might be pretty good as well. And we are also forecasting low volatility.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Picks for 2014 part 1 – rotate into cylicals [2]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [3]
- Penny Pryor: Why I’m considering an SMSF [4]
- Tony Negline: What deeming changes will mean for your pension [5]
- Questions of the week: Property options and what to do with Telstra [6]