Lmeweek: Funds bet on beaten-down basic resources stocks
13/10/2015 09:30
* Some funds, analysts stay positive on mining stocks
* Cheap valuations, higher yields attract investors
* Analysts see positive results of China policy measures
By Atul Prakash
LONDON, Oct 13 (Reuters) - Some brave investors are taking a
risk by betting on a sharp rebound in European basic resource
shares, which have mounted a fledgling recovery recently after
slumping more than 40 percent in just five months.
Investment management and share dealing firm
Redmayne-Bentley has been increasing its exposure to the mining
sector, while wealth manager Crossbridge Capital continues to
hold its investments in Glencore GLEN.L , Rio Tinto RIO.L and
Alcoa AA.N . HSBC maintains an "overweight" rating on the
sector.
Cheap valuations, attractive dividend yields and hopes that
policy action from China, the world's top metals consumer, would
prevent its economy from derailing have been prompting investors
to take advantage of weak share prices.
Shares in miner and trader Glencore crashed about 80 percent
in five months to a record low in late September, while global
diversified miners BHP Billiton and Rio Tinto fell more than 30
percent during the period, before partially recovering.
"We have got a contrarian view on the materials sector,
which is deeply out of favour at the moment," Robert Parkes,
director of global equity strategy at HSBC Bank, said.
"The sector is very sensitive to the global demand outlook,
which we don't believe is falling off a cliff, and we expect
further policy stimulus in China to deliver an upside surprise
to growth in the coming quarters."
Morgan Stanley upgraded the mining sector to "overweight"
from "underweight", saying macro momentum in China could start
to improve in coming months in response to a faster pace of new
policy initiatives.
CHEAP VALUATIONS, STRONG YIELDS
Analysts said the timing was perfect for investors who had
more appetite for risk and a relatively longer investment
horizon as valuations were pretty attractive. Rock-bottom profit
margins could also suggest more mine closures, boosting metals
prices.
According to Thomson Reuters Datastream, profit margins of
European miners have been hovering near record lows, having
fallen to about 11 percent from 17 percent at the start of the
year and from a high of 45 percent in 2011.
"I recently increased my exposure to the mining sector and
intend to buy more. I don't see much downside in commodity
prices as production cuts will give a fresh boost to metals
prices. Valuations are also quite attractive," David Battersby,
investment manager at Redmayne-Bentley, said.
The 12-month forward price-to-earnings ratio for the STOXX
Europe 600 Basic Resources index .SXPP is now 12.5, down from
16 in mid-May, due to a sharp fall in share prices and their
poor earnings outlook. In contrast, the telecommunications and
technology sectors trade at 18 times and 16 times respectively.
The dividend yields of BHP Billiton and Rio Tinto stood at a
high level of nearly 7 percent.
"Their earnings are under pressure because of a sharp fall
in commodity prices, but what they are giving you in return is a
good diversified exposure at a very cheap price," Edmund Shing,
global head of equity derivative strategy at BNP Paribas, said.
"Their dividend yields are also pretty high."
(Reporting by Atul Prakash; Editing by Veronica Brown and Dale
Hudson)
((atul.prakash@thomsonreuters.com; +44 20 7542 6189; Reuters
Messaging: atul.prakash.thomsonreuters.com@reuters.net))
Keywords: METALS LMEWEEK/FUNDS