I believe the bloated iron ore market leaves the likes of mega miners Rio Tinto (LSE: RIO) standing on precarious footing.
The London-and-Melbourne-headquartered company recently touched two-and-a-half-year peaks just shy of £33 per share, taking its share price gain since the start of 2016 to 75%. Rio Tinto has lost some ground since then, however, and I believe further losses may be on the horizon.
Swamped in excess
Current valuations certainly leave room for a downward re-rating, in my opinion. Rio Tinto is expected to enjoy a 30% earnings bounce in 2017, resulting in a P/E ratio of 12.8 times.
This figure is by no means terrible, at least on paper. In fact the FTSE 100 forward average stands closer to 15 times. But I reckon this is still too expensive given the fragile long-term outlook for its key markets.
Iron ore prices have more than doubled during the course of 2016 and smashed through the $80 per tonne milestone just this week. Still, this jaw-dropping ascent is thought to be down to rampant speculative activity rather than improving supply/demand indicators, and the recent clampdown on these trading activities by Chinese authorities could send values sinking.
And on fundamental side, latest data from China’s ports showed cumulative stockpiles of 110m tonnes, the highest level for more than two years. Furthermore, the country’s decision to shutter hundreds of tonnes of steel capacity casts an extra question mark over future consumption.
At the same time global supply has steadily ramped up, as producers seek to capitalise on recent commodity price strength, threatening to keep the market swamped in excess material for some time yet.
Rio Tinto sources around two-thirds of group earnings from the iron ore sector. But oversupply in this market is not the company’s only problem as the prospect of further Federal Reserve rate hikes could provide the US dollar with further jet fuel and put prices of all commodities under the cosh.
I reckon there are plenty of factors that could drive Rio Tinto’s share price lower in the months ahead.
Make a withdrawal
I also believe the prospect of prolonged income troubles and the pains of ongoing restructuring makes Standard Chartered (LSE: STAN) a poor pick at present.
But these problems certainly aren’t baked into the share price, in my opinion. For 2017, City analysts expect earnings at Standard Chartered to explode 132%, resulting in a P/E ratio of 17.2 times. But I reckon this giddy forecast is in danger of a swingeing downward revision as the firm warned in November that “market conditions are expected to remain challenging.” The company saw revenues dive 6% between July and September, to $3.47bn.
Standard Chartered is ramping up its efforts to mitigate these perilous waters, and rumours surfaced last month that the firm will axe 10% of the workforce in its corporate and institutional banking divisions in the latest move to cut costs.
But the bank’s long-running transformation strategy is still failing to turn the ship back in the right direction, and the Bank of England’s latest round of stress tests showed that Standard Chartered still had “some capital inadequacies.”
With questions still raging over the extent of macroeconomic choppiness in the emerging markets of Asia in 2017 — and particularly as the Fed looks set to keep hiking interest rates — I reckon shrewd stock pickers should give Standard Chartered the cold shoulder.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.