Losing faith in resources

Despite a slight resurgence in the last week, resource companies have acted as a drag on the broader market over the last couple of years, largely caused by the slowing down of the world’s second largest economy.

There have been increasingly large signs of a growth slowdown in China, as demand for resources such as iron ore continues to weaken. On Friday, China’s Finance Minister all but confirmed this belief as he downgraded the country’s growth forecast to just 7% for the year – the lowest growth rate in over 20 years.

As such, a number of leading fund managers have, in their end-of-financial year letters, admitted that they are now losing their faith in resources stocks. The head of Australian equities at Schroders, Martin Conlon, stated that although most mining and mining services stocks have been “savaged”, there were still none which presented themselves as great opportunities at today’s prices. Similarly, Simon Marais from fund manager Allan Gray, believes that “it is unlikely the correction will be over in one year” after a decade of solid returns.

On the other hand, it is the belief of Jamie Nicol, chief investment officer at Dalton Nicol Reid, that resource companies could actually outperform other defensive yield companies, based on a number of factors. First, the plummeting Australia dollar is set to boost exports. Second, companies such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are savagely cutting costs to ensure long-term sustainability, which should also help to boost profits. Finally, as the dollar falls, many foreign investors will ditch their holdings of defensive stocks such as the banks or Telstra (ASX: TLS), whilst fewer foreign investors actually own shares in resources companies.

Foolish takeaway

Although many mining companies are certainly sitting at more attractive prices now than in the past, the level of volatility in the sector casts enormous doubt over the future of many companies. It may be wise to either remain on the sidelines until the volatility begins to subside or, otherwise, consider a number of other well-run companies with enormous potential.

For instance, The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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