MARKET SPECTATOR: Gearing up for material gains

The materials sector has missed out on the recent ASX200 rally but indications are that on the back of overseas stimulus money it may be about to rejoin the party.

Are materials names about to drive the S&P/ASX 200 higher?

It’s common knowledge that materials names have largely missed out on the recent rally in the S&P/ASX 200. Given the weighting of materials sector in the domestic market, it’s been a while since the broader index has rallied without the participation of the big miners.

The recent push higher in the local market has been largely driven by the flow of money towards high yielding stocks, from both domestic and international sources. With interest rates so low in much of the developed world, a lot of money has been forced to chase high yielding assets in the search for a real return on their funds. In terms of stocks, that means the likes of the big banks, consumer staples and defensive names. This has also been a huge support for the Australian dollar too, but that’s the topic of another piece.

Now it looks like the materials sector is re-joining the party. On the S&P/ASX 200 materials sector chart below, you can see that prices have just broken out through the downtrend that has been in place since mid-2010, as well as the horizontal resistance in place since late June this year.

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S&P/ASX 200 Materials Index

So what’s this telling us? Well it looks like money is starting to return to the materials sector, largely the big diversified miners in BHP Billiton & Rio Tinto as well as more pure play miners like Newcrest, and many of the mid-cap miners too. This money looks to be rotating out of some of the more defensive sectors like healthcare, utilities and consumer staples, which have seen a great run recently.

The major catalyst behind this sudden change has been the huge amount of global stimulus announced in the last two weeks. It all started with Europe, then China with their huge infrastructure spending plans and finally, the QE3 announcement from none other than the US late last week.

Whilst the European stimulus package has certainly helped ease eurozone fears, it’s been the Chinese and US packages that have really helped sentiment towards materials stocks. The Chinese announcement reinforced the view that they will look to stimulate the economy where possible while the switching on of the printing presses in America has devalued the US dollar further, which naturally increases the price of all US dollar denominated commodities. Precious metals have also rallied hard on the back of this as participants look to hedge themselves against future inflationary problems.

So it’s definitely going to be a space to watch, especially if the US dollar continues to devalue which will put a natural floor under US dollar denominated commodities prices. If this materials strength continues, keep an eye on mining services stocks too. These names have been punished in recent months and may begin to recover.