Could This Sneaky Sector Rally Send The FTSE 100 To New Highs?

After last year’s rip-roaring gains in the stock market, perhaps we shouldn’t be surprised that the FTSE 100 (FTSEINDICES: ^FTSE) has had a lacklustre year so far.

Still, it’s hard not to be disappointed.

In the first six months of 2014 the index of 100 leading companies advanced a squint-and-you’ll-miss-it 0.8%. That measly move leaves us with some serious catching up to do if we’re to enjoy anything like the near-14% gain clocked up last year.

Of course even a year is a short time in the stock market, and expecting gains to come in neatly to fit our calendars is unrealistic.

More importantly, it was only a few years ago that the FTSE 100 was down around 50% from its high! So let’s not get complacent.

Still, with the global economy on the mend and valuations looking reasonable, I suspect there’s still plenty of room for the FTSE 100 to run – especially if one forgotten sector of the market really gets going.

Mine – the gap

The basics materials sector of the FTSE 100 consists of mega-miners like BHP Billiton (LSE: BLT), Rio Tinto and Glencore Xstrata.

Having boomed throughout the previous decade, the past few years have seen weak returns from these companies. Commodity prices have fallen, and that exposed many of their late-cycle projects as expensive follies. Big writedowns followed, inevitably hitting share prices.

The real carnage has been in the small-cap sector, but even the large integrated miners have been punished. BHP Billiton’s share price fell nearly 13% last year, for instance. That’s a big move for a company which currently sports a market value of over £100 billion.

These declines weighed on the index last year, although as I say it still managed to deliver an excellent performance overall.

Have the miners bottomed?

There are signs that miners may have turned the corner, however. Company C suites have been cleared out, and the new brooms running these businesses today talk promisingly about stewarding shareholder capital and delivering sustainable long-term returns.

And investors seem to be buying it.

The big miners share prices are doing far better in 2014 than that 0.8% return from the FTSE 100:



Gain in 2014

Anglo American



BHP Billiton



Glencore Xstrata



Rio Tinto



Note: Excludes dividends.

With the exception of Rio Tinto, these companies have been on a tear this year, yet it’s a move that I’ve barely seen discussed in the mainstream financial media.

Basic resource companies comprise over 8% of the FTSE 100, so you can see that the index would actually be flirting with negative territory in 2014 if it wasn’t for these share price gains.

By the same token, if this un-regarded rally continues, then it could lend a big helping hand to the FTSE 100’s push towards new all-time highs.

Digging for value

The miners' sneaky move higher reminds us again that it's very often in the more neglected areas that value in investing lies.

For example, soaring house prices are tempting more people back into buy-to-let, but I think they would find far better value for money in the bargain section of the stock market, rather than by buying into what increasingly looks like a house price bubble.

If you're a contrarian investor who likes to avoid the herd and get tomorrow's winners today, then you should download our exclusive investment report. Happy prospecting!

Owain owns shares in BHP Billiton.