Missing out on the latest bright investment trend is a horrible feeling. As a stock picker, it can mean losing an opportunity to significantly boost returns. It’s never a nice feeling to think you’ve been late to the party while other investors are making a mint. Plenty of FTSE 100 investors have been left holding their heads in their hands following extreme price gains.
There’s an abundance of FTSE 100 shares that have rocketed since the index’s 2020 lows of just below 5,000 points struck in March. Some of these barnstormers appear to have much further to rise. But it’s not all good. Some of the recent risers appear in danger of sharp reversals.
Metal mammoths
Major FTSE 100 miners Anglo American (LSE: AAL) and BHP Group (LSE: BGP) have been among the most impressive performers recently. In the past three months, their share prices are up 43% and 30% because of the booming iron ore price. The steelmaking ingredient has shot back above the $100 per tonne marker. But are prices looking a bit frothy right now?
Iron ore values have been supported by recent supply disruptions in Brazil. Over the long term, however, prices look “unsustainable” at current levels. That’s according to the boffins at UBS, who reckon the price will drop in the second half to average $91 per tonne in 2020. They reckon prices will keep trending lower at least until to the middle of the decade. They say that iron ore will fall to average $80 per tonne next year, then $70, $65, and $60 in 2022, 2023, and 2024.
Better FTSE 100 shares
This is clearly a big deal for Anglo American and BHP Group. For both companies, iron ore is by far their single most important market, generating 34% and 41% of total underlying earnings. While both firms have ambitious plans to boost production over the next few years, these measures threaten to be derailed by lower ore prices.
For these reasons I’m not tempted by either firm’s low earnings multiples, of between 11 and 14 times. I don’t care about their chunky dividend yields either, even though BHP’s forward reading currently sits at a mighty 5.8%. Excess supply also threatens to swamp the markets for other commodities produced by the miners. As a result, I think they carry too much risk.
That’s not to say that FTSE 100 investors looking for exposure to mining need to be too disappointed. Some of the best UK shares to buy today are those involved in the production of precious metals. Take Footsie giants Polymetal International and Fresnillo, for example. These shares have gained 12% and 31% respectively in value over the past three months. And they look in much better shape to keep rising as low interest rates and intense macroeconomic and geopolitical tension should keep driving gold and silver prices skywards.
