MARKETS SPECTATOR: Miners move into contention

The long awaited move into mining stocks may be beginning with price-earnings ratios comparing well with rival sectors.

Miners may be finally getting some love.

Yesterday, BHP Billiton Ltd, Rio Tinto and Fortescue Metals Group all rose. The four biggest banks all fell. That has largely been the pattern since the beginning of the week.

According to asset mananger Perpetual, miners have woefully underperformed the market for some time. Since June 30, 2012 miners have had a total return of 1.4 per cent. The banks’ have had a robust 40 per cent total return. The market’s total return is 26 per cent. That’s prompted continuous market chatter in recent days that mining stocks may be taking off.

Buttressing gains in miners was a benign Chinese March inflation rate. Consumer prices rose 2.1 per cent in the world’s most populous nation. That has eased concerns the People’s Bank of China will tighten monetary policy, dampening economic growth; good news for miners who hope for a recovery in Chinese demand for their raw materials.

But miners are hardly cheap. BHP is currently trading at 10.8-times earnings compared to its three-year average of 10 times. Rio is trading at 9.2-times versus a three-year average of 8.8. Fortescue is currently trading at 5.7-times compared with its three-year average of 8.3.

Any rally in miners may not be at the expense of the banks. The banks’ attractive yields are perceived to underpin their share prices and may even boost them. Still, the banking sector is trading at 13.3-times, versus a three year-average of 10.7 times.

Non-financial industrial stocks are trading at 16-times versus a three-year average of 13.7 times. That makes them vulnerable to a sell-off. That money may well be deployed into mining stocks.

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