Commodity prices are on the roll. Brent crude’s price crossed $60 a barrel recently. Industrial metals like iron ore and copper have been on a tear over the past year too. No wonder then, that there’s a growing view that a new commodities’ supercycle could be here. If it is, mining stocks could be among the best UK shares to buy now.
What’s driving the commodity supercycle?
But first, what’s driving the commodity supercycle?
Investment bank JP Morgan points to the return to growth, end of the trade war, soft monetary policies, and government spending as drivers. This view reinforces Goldman Sachs’ forecast for a bull market in commodities in 2021, driven by the social crisis that is Covid-19.
As per JP Morgan, this could last for many years. Signs on the ground may already be visible. This week alone, mining results are more positive than not, indicating gains from the commodities bull run.
Best UK shares to buy now
This only adds to my belief that miners are good stocks to buy anyway, a point I’ve long made. There are four reasons for this.
- In general, a typical miner’s share price chart — like that of Rio Tinto or Anglo American — has an upward sloping graph over the past five or six years. You can’t rely on past performance to predict future performance, but this does give me confidence that my capital will likely grow overtime.
- Miners usually pay dividends too. FTSE 100 miner Glencore had paused on dividend payouts last year, but has resumed them now.
- Typically, they are also largely financially healthy. To me this is the most important feature to consider when buying a stock for the long term.
- Their share prices are still affordable, with price-to-earnings (P/E) ratios hovering around the mid-teens. This makes them more competitive relative to FTSE 100 defensives like National Grid or AstraZeneca.
The mining sector alone gives much choice to investors if we consider the FTSE 100 constituents. This brings up the question, among mining stocks, which are the best UK shares to buy now?
Here are three options that could work well, I think:
#1. Rio Tinto: impressive earnings
Rio Tinto’s annual results released earlier today showed earnings at a 10-year high. The world’s biggest iron ore producer also has a dividend yield of 4.75% and its share price pretty much breezed through 2020. And now we have a possible commodity supercycle underway.
#2. BHP: rising dividends
The multi-commodity miner’s results earlier this week were great too. Its earnings rose to the highest for the first-half in seven years. Its share price has been on the upswing since even before the market rally started in November last year. It too pays a dividend, with a yield of 3.2%.
Risks to consider
Mining isn’t without its risks though. As a cyclical sector, at some point, it will see a softening in demand and prices. Moreover, the supercycle theory may not play out over time if the fiscal stimulus fizzles out or China’s domestic metals production ramps up significantly.
For now, however, the odds seem to be stacked in favour of miners. I think they are among the best UK shares I can buy now.
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Manika Premsingh owns shares of AstraZeneca and Glencore. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.