The emerging market growth story is something which all Fool readers will undoubtedly be familiar with. Indeed, a major beneficiary of the boom has been the mining sector, with China in particular demanding a vast array of metals with which to construct huge infrastructure projects.
However, in recent months the emerging market and, in particular, the Chinese growth story seems to have cooled somewhat. Chinese GDP and macroeconomic numbers have been slightly disappointing (although they are still figures which new Bank of England Governor, Mark Carney, can only dream of achieving) and investors are beginning to question whether mining companies such as BHP Billiton (LSE: BLT) (NYSE.BBL.US) have a prosperous future.
Indeed, the mining sector currently trades on a price-to-earnings (P/E) ratio of just 7.2, which is well below the FTSE 100 P/E of 12.7. With market sentiment clearly being unfavourable towards the mining sector, should Fool readers look elsewhere for their next potential ten-bagger?
The short answer is: NO! Certainly, economic data has not been as impressive as investors would have hoped for. In addition, China is unlikely to continue to engage in the scale of infrastructure projects that it has done in recent years, with the government seeking a transition to ‘softer development’ and the advancement of Chinese companies and brands being a major objective.
However, China is not the only emerging market. India, for instance, is now the largest consumer of coal in the world (which BHP Billiton partly supplies) and there are many other countries across the world that have yet to build roads, bridges and buildings as China has done. So, the mining boom may not be over just yet.
Furthermore, currency movements have made life difficult in recent years for miners such as BHP Billiton, which has major assets in Australia. With the Australian dollar being so strong, the situation has worked against BHP Billiton as many of its costs are in Australian dollars, while its revenues are in US dollars. However, this situation is starting to show signs of reversing, with the US dollar strengthening versus the Australian dollar in recent weeks.
In addition, BHP Billiton is the most diversified of the UK-listed miners. Of course, its bottom line does depend to a large extent on the prices of the metals its sells but it is less sensitive to the price changes of one metal versus its peers, as it mines a wide range of metals including copper, aluminium and iron ore.
Finally, the best bit is that you can buy shares in BHP Billiton for just 8.5 times 2012 earnings and enjoy a yield of 4.2%. Surely a continuation of the emerging market growth story isn’t that unlikely…
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> Peter owns shares in BHP Billiton.
