Some mining giants have been marked down by 20%. Are they worth buying?
As ever it's only obvious in retrospect, but there was cheery agreement about the stock market as 2010 dawned.
After the 2009 rally, with most of the world out of recession and the emerging countries going great guns, the money sections of the Sunday newspapers had returned to 'Which Country Will Do the Most Amazingly Well in 2010?' articles, forgetting that less than a year ago they'd proclaimed equities dead.
Even bearish market watchers had shifted their flinty eyes to late 2010 or 2011. Rate rises would then take the shine off investing in equities, they said, but the positive momentum looked unstoppable for the next few months.
As ever, greed cometh before a comeuppance when investing, and this rosy outlook suddenly turned to a blush of embarrassment.
The index of the UK's 100 largest companies closed last night at 5,146 -- down 8% on its post-credit crisis peak of 5,600 on 11 January, and 6.5% lower than that first bright trading day of the year.
Made in China
Of course, an 8% downturn in shares is unpleasant if you need to sell your portfolio today, but it's little more than noise in the grand scheme of things.
And personally, I think that cheery near-term consensus for equities is still more likely to be right than wrong -- with that caveat that nobody can truly predict short-term market moves with any consistency.
Some of the more colourful explanations for the recent mini-slump are very unconvincing:
- Increased banking regulation -- who has this surprised, exactly?
- Fed Chairman Ben Bernanke losing his job -- he wouldn't, and he hasn't.
- Greek debt woes -- the country is a drop in the Eurozone's bucket.
- Shares were 'technically overbought' -- yes, and I've invented a perpetual motion machine that's yours for £500. (Chartists are grubby men with holes in their raincoats, to paraphrase Jim Slater)
There is one explanation with merit, however -- at least in as much as share traders believe it -- and that's the fear of China damping down hard on its economic growth, which is widely seen as supporting the global recovery.
As I mentioned above, the stock market's recent peak was on 11 January. And it was on 12 January that China's central bank began monetary tightening, raising the bank reserve requirement ratio by 0.5% and almost imperceptibly increasing short-term interest rates.
As Confucius might have said, "Go figure".
Extracting the poor performers
Whether traders are right to go lily-livered at the prospect of anything short of free money forever, it's clear the Chinese move spooked the market.
Just look at the FTSE 100 shares that have been most affected:
Ten out of 15 of the biggest fallers are miners -- and they are to China what krill is to a blue whale -- while two of the others are energy companies geared to global growth.
Even Kingfisher owns China's largest DIY chain, leaving just three volatile financial stocks as not being directly dependent on the Chinese economy.
Mine, all mine
I've admitted I agreed with the cheery consensus for shares (although like somebody who followed Coldplay or Muse before they were famous, I'd like to think I was among the first!)
And for what it's worth, my view hasn't changed, although clearly gains will be more modest after the strong recovery in 2009.
Yes, central banks will tighten in 2010, but there's a huge lag on monetary policy anyway -- the effects of the massive rate cuts we saw in Spring 2009 won't have fully filtered through yet, to say nothing of the unknowable impact of quantitative easing.
If anything, as a result of the strong return we've seen to global growth while rates have stayed low, I'm more worried about inflation in the medium term than an anaemic recovery.
If you agree, it could be a good time to buy some of the miners at a marked down price. Resource companies should do well as the economic recovery continues to gather, and they'll also provide a hedge against inflation.
Xstrata, for instance, is expected to grow profits by around 80% in the current year, and it trades on a forward P/E of just 9. The share price has enjoyed a massive recovery since its 2009 lows, but it's still less than half the level it hit in 2008 and is 19% off its high of this month.
Or take a look at Anglo American, which is down 20% from its January highs. Analysts are expecting almost 50% growth in earnings in 2010, and the shares on a reasonable forecast P/E of 11.
Alternatively, just buy the FTSE 100 via an index tracker or ETF -- but perhaps risk taking some money off the table the next time you find yourself agreeing with the crowd!
More from Owain Bennallack:
Note: Owain owns shares in Anglo American and Man Group.
