The share price performance gap between the big banks and large cap resource stocks just narrowed as the embattled banks enjoyed a bounce in their share price today.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) defied the odds to trade 0.4% higher in the last hour of trade and the gains are led by the big four with shares in Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) adding more than 1% each.
Resource leaders are doing well too but the day clearly belongs to the big four, which are finally catching a welcome reprieve from the sell-off triggered by the Banking Royal Commission. Does this mark a turning point?
After all, commodity prices are pulling back recently and some may have even overshot on the upside. In contrast, the banks are trading at their biggest discount to their average valuations in years and are promising big, fat and fully franked dividend yields.
But don't bank on the sectors switching places (all pun intended)! Experts interviewed by the Australian Financial Review are urging investors to "go long" on commodities ahead of the peak in global economic growth.
Go long means to buy the asset in anticipation of higher prices. These experts say the volatility in commodity prices is normal even though the economic environment is bright for minerals and oil.
I couldn't agree more. Commodities have historically performed strongly in the later stages of the growth cycle. Given that economists, including the International Monetary Fund (IMF) are forecasting a pick-up in global growth, this isn't the time to be underweight on resources.
This is because faster economic expansion requires more raw materials. As demand for commodities like iron ore, copper and oil increases to fuel economic growth, the demand-supply balance starts shifting in favour of higher prices.
Our miners and energy producers are well placed to benefit from this thematic and the outperformance of stocks like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) still leaves them in value territory with a sizable dividend to boot!
The recovery in the big banks may also be a dead-cat bounce given that the headwind buffeting the sector doesn't seem to be abating anytime soon.
If you like buying quality, stick to large cap resources for now. There will be a time when a rotation into the banks makes sense. The time just isn't now.
If I had to hazard a guess on the timing, it could be 3Q or 4Q of this calendar year when analysts start downgrading their earnings forecasts on the big banks.
This isn't counter-intuitive because that could mark the end of the banks downgrade cycle. You don't want to be bargain hunting until you can see the light at the end of the dark tunnel.
Stay tuned.
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