Investors steering clear of mining stocks

Fears of a slowdown in China, lower commodity prices and US tapering are giving analysts too many reasons to steer clear of the mining sector.

Companies such as Fortescue (ASX: FMG) and Rio Tinto (ASX: RIO) rely heavily on emerging markets’ growth for consistent levels of demand for their products. China and other countries throughout Asia have experienced massive amounts of growth in the past two decades, driving demand for commodities such as copper and iron ore. However, many investors are expecting the price of such commodities to weaken as demand falls and supply increases.

Conversely, other resource plays such as BHP (ASX: BHP) and Woodside Petroleum (ASX: WPL) have been favourites among analysts because of stronger expectations in the short to medium term. Citi equity strategist Tony Brennan was quoted in The Financial Review as saying “resource earnings are also slated to lift again, as production ramps up and after the decline in prices already, making solid earnings growth possible for the market”.

Based on dividend yield and future expectations, against their peers miners aren’t cheap and if investors wanted to play the lower Aussie dollar, there are other stocks available. Twenty-First Century Fox (ASX: FOX) and CSL (ASX: CSL) are some of UBS equity strategist David Cassidy’s plays for a lower AUD.

Over the past two years S&P/ASX 200 Resources (ASX: XJR) and S&P/ASX200 Energy (ASX: XEJ) have underperformed the S&P/ASX200 Industrials (ASX: XNJ), as shown in the graph below.

Source: Google Finance

In the near future a lower dollar, an upwards lift in the domestic economy and low interest rates should help growth in profits and share prices of many industrial stocks.

Foolish takeaway

With so much uncertainty surrounding the growth of China and commodities prices like iron ore, investors who exercise patience before buying mining stocks may be presented with a better opportunity in coming months. This is not to say that miners are bad companies merely that no stock is a buy at any price and when there are other companies that yield twice as much and don’t have the uncertainty surrounding them, it seems foolish to buy in now.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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