Big Australian Resource Stocks Up 24% in 2008

There’s just one full week left in the financial year. And what an awful year it’s been! The All Ordinaries index is down just over 14% for the year. It’s the worst showing for the benchmark since 1982.

But when you thin-slice the performance, you find something interesting. Specifically, you find local evidence of the global battle between the forces of commodity inflation and asset deflation. The big Aussie banks are down by nearly 30% for the financial year. Meanwhile, the big resource stocks are up 24%.

“Every kingdom divided against itself is brought to desolation; and every city or house divided against itself shall not stand,” Jesus tells the Pharisees in Matthew chapter twelve.

We’re not sure you can apply that directly to investment markets. But we thought about this morning when considering what an investor is to do right now.

Abraham Lincoln quoted the same line in a speech about slavery, delivered in June of 1868. He told Americans their nation could not exist half-free and half-slave. Lincoln then prosecuted a bloody civil war to prove his point and keep the nation whole (while inflicting a psychological blow from which the American South has never fully recovered).

But let’s not debate the American civil war or what kind of tyrant Abraham Lincoln was. What we’re after is if investors can generate absolute returns in the Aussie market buying both financial and resource stocks. Will this divided Aussie house stand or fall?

Aren’t the valuations on bank stocks cheap? Yes! National Australia Bank (ASX:NAB) trades at 8.47 x trailing earnings, Commonwealth Bank (ASX:CBA) at 11.22x, ANZ (ASX:ANZ) at 8.93x, and Westpac (ASX:WBC) at 9.7x. Those all look cheap.

The trouble is you need to know what the forward earnings multiples are. You need to know future earnings. Of course no one can actually know what next year’s earnings will be. But the banks could offer us projections. Analysts would have their own opinion as well.

Our analysis? Cloudy. The earnings picture for banks is still very cloudy. If high oil and energy prices send Australia’s economy into recession, demand for loans is going to fall. Banks make money by lending money. You do the maths. Without an increase in lending volumes, banks have to generate earnings from higher fees.

On the other hand the resource stocks-as we’ve mentioned before-seem to have moved to the head of the cyclical queue. Copper and aluminium prices were up nearly seven per cent last week. Tin was up eight per cent. And those laggards lead and zinc were up nearly six and three percent, respectively.

You’d think that would be good news for resource stocks, specifically base metals. And it is, in a general sense. But part of the price rise comes from production disruptions due to higher energy costs. That’s not good. In your stock selection, then, you have to focus on low-cost producers.

What you’ll find for the rest of the year, we reckon, is highly differentiated performance. The general direction of the market will be apathetic. After all, it looks like we’re in for another wave of losses in the credit markets. Stocks will have a hard time rallying with recurring write offs and high oil prices.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Yes, the “nasty speculators” that sanctimonious politicians are getting their nickers in a not over, are betting on the US dollar, not the oil price.

US Stock Futures Head Lower

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