Miners lagging market but analysts believe there's hope
Weak revenues, high fixed costs and falling commodity prices have seen the mining sector experience its worst run on the sharemarket since 1999, but some analysts believe the sector has potential for growth in the second half of this year.
In contrast to the recent bull-market run, which has lifted the sharemarket by more than 24 per cent since early June, the resources sector has struggled, underperforming Australia's top listed companies by 40 per cent in the past two years.
Mining shares were trading cheaper than the rest of the ASX200 as measured by the earnings-per-share estimates at 11.3 times forward EPS, a 30 per cent discount to the industries sector, Goldman Sachs analysts Matthew Ross, Alistaire Paterson and Alain LeBel wrote in a report.
But the analysts said relative to long-run multiples, metals and mining stocks were attractive.
"While we remain concerned about the short-term momentum in the sector, we have taken the opportunity to review the long-run performance, earnings and valuation trends given the relative value that has emerged over recent months," the analysts wrote, adding that they had recently downgraded the sector from overweight to neutral.
"Despite the sector's poor momentum at the time, we were hesitant to move underweight given the valuation support on offer."
Goldman Sachs increased its ownership of NRW Holdings, a mining contractor, to 5.04 per cent — just above 14 million shares, the financial services company said in a statement to the ASX on Tuesday.
"That shows to me they are advising clients that they have faith in the sector," said Rohan Schmidt, a senior portfolio manager at Leyland Private Asset Management.
"The point is: it's going to be a bit volatile in the short term, but in the second half of the year, I agree that we are looking for a rebound in the mining sector. Those buying mining stocks at the moment will be well rewarded later this year."
RBS Morgans' strategists added in a research note that despite continuing structural concerns about China's economy, the outlook for both policy and growth was positive and that the large-capitalisation mining sector was "attractively valued".
"We take an opportunistic position in materials given our view that downside risks to Chinese growth are limited and the market is over-reacting to property-tightening measures," the strategists said.
The weakness of the mining sector has highlighted the strength of banking stocks on the ASX over the past few months.
During previous rallies on the Australian sharemarket, such as between 2003 and 2007, and in 2009, resources stocks - in particular, BHP Billiton and Rio - joined the big four banks as the top 10 leading movers.
In the rally since June, Commonwealth Bank has led the charge with more than 17 per cent growth, followed by Westpac with 9.1 per cent, while the two mining giants were among the biggest drags on the market.