Since my last review of the materials sector in November, six stocks have exited the ASX 200 and only one has entered as mining stocks got beaten up. 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.
Contrary to the unofficial data from HSBC and the resulting bouts of jitters in the market, the official China manufacturing PMI on 1 June surprised the market with a reading of 50.9. This suggests improving rather than deteriorating conditions, and not the contraction that many commentators seem to want to write about.
The Materials sector is the only sector with a negative total return (including dividends) year-to-date. The sector’s capital gain since my last review is -7.8% against a +9.2% for the ASX 200, both year-to-date.
Last review, I favoured BHP and RIO but was not attracted by Newcrest and Fortescue – among others. Lynas and Atlas were my smaller stock picks. The performance of all stocks in this sector are shown in Table 1 – along with the Thomson-Reuters consensus broker recommendations (1 = buy down to 5 = sell).
Iluka, the mineral sands company was the only stock to do well but that was largely due to its price being in a temporary dip at the time of the last review. Three of my stocks beat the Materials Index (BHP, LYC and BHP) and all three now have improved ratings. Atlas suffered the fate of most junior and mid-tier miners and its rating has slipped a fraction. However, the success of Atlas going forward depends upon its negotiations and planning over how it gets its iron ore to port. I still like it and I am sticking with the other three too. Lynas got through all of its political/regulatory hurdles in Malaysia, but rare earth prices have fallen.
None of the Small Cap mining stocks in Table 1 came close to beating the Materials index which is unsurprising given the environment. The new entrant into this index, Northern Star, had the best possible rating of a 1.0 at my last review (but outside the ASX 200) and still has an impressive rating of 1.5 – being halfway between an outright buy and a market outperform. During this time, its stock price has fallen 42.3%. Troy Resources and Medusa Mining are also attracting the attention of the analysts – but not me.
We can see the prospects of this sector in comparison to the other sectors of the ASX 200 in Table 2 – noting that Materials – mining and non-mining – appears as a single entry. The exuberance column, which measures whether a sector is expensive or cheap, shows Materials is not only the cheapest ( 14.9%) but very cheap in absolute terms. It seems that these stocks have been very oversold. As this sector also has the highest forecast capital gains (24.9%) over the next 12 months – making an adjusted capital gain (capital gain – exuberance) of 39.8% – it makes this sector attractive subject to a risk assessment – of course!
Although Materials stocks are not known for their dividends, 3.6% is not a bad forecast yield particularly if the likes of BHP start paying higher dividends because it is putting some investments on hold. Goldman Sachs talked up the rotation from Financials into Mining at the end of May. That has been my theme for months and it seems to be even more compelling today. Of course, a little more cash might come off the sidelines and into high yield Financials (now that they are cheap at -3.7%) to accompany further investment in Mining stocks.
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.
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