Miners lagging market but analysts believe there's hope
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.
Frequently Asked Questions about this Article…
The article cites weak revenues, high fixed costs and falling commodity prices as key reasons. Together these factors have driven the mining sector into its worst run on the sharemarket since 1999, and resources stocks have underperformed Australia's top listed companies by about 40% over the past two years.
Yes. According to the article, mining shares were trading at about 11.3 times forward earnings per share (forward EPS), roughly a 30% discount to the broader industries sector. Goldman Sachs highlighted that relative to long‑run multiples the metals and mining sector looks attractive.
Some analysts quoted in the article believe there is potential for growth in the second half of the year. While they remain concerned about short‑term momentum, several strategists see valuation support and are looking for a rebound later in the year.
Goldman Sachs increased its ownership of NRW Holdings to 5.04% (just above 14 million shares). The article notes market commentators interpret that move as a signal Goldman Sachs has faith in the sector and may be advising clients to take an interest in mining contractors.
RBS Morgans' strategists acknowledged structural concerns about China but said the outlook for policy and growth was positive. They argued downside risks to Chinese growth are limited and that the market may be over‑reacting to property‑tightening measures, making large‑cap mining stocks attractively valued in their view.
Banking stocks have been notably stronger. Since the rally began in June, Commonwealth Bank led with more than 17% growth and Westpac rose about 9.1%, while the two mining giants were among the biggest drags on the market during the same period.
The article indicates short‑term volatility is likely: analysts remain cautious about momentum but point to valuation support. Some experts say buying mining stocks now could be rewarding later in the year, but they stress the sector may be bumpy in the near term.
Historically, during rallies such as 2003–2007 and in 2009, resources stocks—especially BHP Billiton and Rio Tinto—joined the big four banks among the top movers. In the most recent rally since June, however, those two mining giants were among the biggest drags on the market.
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