MENU

Could the miners take over the banks rally?

The big four banks may have played an enormous role in driving the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to multi-year highs over the last 15 or so months, but their strong rallies could be nearing an end, which would leave it up to the miners to take the lead.

The banks

Since June 2012, the banks have been a popular option amongst investors due to their ‘safety’ and high dividend yields, which have been more attractive than the returns from term deposits. Westpac (ASX: WBC) has climbed an incredible 70% since that time, whilst ANZ (ASX: ANZ), NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) have each gained 58%, 53% and 63%, respectively. Of the banks, ANZ currently boasts the lowest P/E ratio of 13.5 whilst the highest is maintained by CBA at 15.5.

Whilst CBA delivered a record annual profit and the others are expected to do the same, many analysts are cautioning that the profits may be harder to come by in the years to come. On the back of soft credit growth, UBS analyst Jon Mott believes that they could deliver just 4% earnings per share compound annual growth for the next 3 years – making their current price overly expensive.

Furthermore, shareholder returns could begin to lose some oomph after the banks were warned to build their reserves in case of a major downturn in the economy. The possibility of limited dividend yields would be unattractive to many investors, which could see share prices fall.

The miners

On the other hand, Australia’s largest miners have substantially underperformed the benchmark index in that time. Whilst the ASX 200 has increased 33.7% since June 2012, BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have climbed just 18.6%, 17% and 26%, respectively.

What’s more, the gains recognised by the miners have only really come on in the last 4 months, with commodity prices showing strong resilience.

For instance, iron ore’s price has remained far stronger than many had anticipated. Most analysts had expected the price on the commodity to remain around US$100 per tonne, but it has resided above US$130 a tonne instead. With the miners continuing to increase productivity and cut costs, they are also focused on increasing shareholder returns (think, BHP’s progressive dividend policy).

Outlook

Goldman Sachs broker Richard Coppleson believes that the miners and banks can “easily” continue working together in the lead up to Christmas to take the market to new highs – particularly given the refreshed confidence following the aversion of the US debt crisis (for now).

As China has remained stronger than many had expected, the resources stocks should perform well in the coming months. BHP and Rio Tinto, which maintain more diversified operations, would be the safest bets going forward.

As was previously highlighted, investors can recognise enormous gains from investing in blue chip companies, however, there are also substantial gains to be recognised from smaller companies. Savvy investors are now seeking growth in smaller companies. Discover two stellar small-cap opportunities now, in our brand-new research report, “2 Small Cap Superstars” — simply click here to download your FREE copy.

More Reading

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.