Investors began rotating out of ASX 200 bank shares, which have had a phenomenal run since November 2023, into downtrodden iron ore stocks as soon as we heard about new stimulus measures in China.
That news broke last Tuesday.
Here's what has happened to the banks and major miners since then.
The ASX 200 iron ore stocks did this…
- Mineral Resources Ltd (ASX: MIN) shares leapt 41%
- Champion Iron Ltd (ASX: CIA) shares rose 21%
- BHP Group Ltd (ASX: BHP) shares jumped 14%
- Fortescue Ltd (ASX: FMG) shares increased 13%
- Rio Tinto Ltd (ASX: RIO) shares lifted 12%
Whilst the ASX 200 bank shares did this…
- Westpac Banking Corp (ASX: WBC) shares dipped 9%
- National Australia Bank Ltd (ASX: NAB) shares fell 7%
- Commonwealth Bank of Australia (ASX: CBA) shares lost 5.5%
- ANZ Group Holdings Ltd (ASX: ANZ) shares decreased 5%
- Macquarie Group Ltd (ASX: MQG) shares dropped 2%
As the charts above show, ASX 200 bank shares have been steadily rising since November 2023.
Meantime, ASX 200 iron ore shares have slumped in 2024 due to concerns over China's economic health and the falling iron ore price, which hit two-year lows in the September quarter.
The question is, will this rotation continue?
Here's what an expert thinks
Tom Hays, research analyst at Tyndall AM, says there is now a "significant valuation gap" between the banking and resources sectors today.
In short, the major ASX 200 mining shares are looking cheap next to the banks.
In an article, Hays comments:
The Banks sector has surged to an all-time high P/E of 18.4x, well above its historical average of 12.8x, even exceeding the +1 standard deviation level of 14.5x, indicating stretched valuations.
In contrast, the Resources sector is trading at 12.1x forward earnings, below its long-term average of 13.3x, making it the cheaper of the two sectors to own, which can be expressed through owning quality businesses like the iron ore majors.
Hays suggests the incredible run for ASX 200 bank shares may be at least partly attributable to the selldown in mining stocks amid weaker commodity values this year.
He said:
The stretched bank valuations have likely been partly an expression of the market being underweight China and resources given bank earnings have largely been in line with expectations.
Pristine asset quality and extremely low bad debts have been the prime drivers providing some modest earnings growth.
The obvious catalyst for a bank correction was either via the resource's rotation from confidence in a China recovery or the potential of a recession in either Australia or the USA. The former is emerging, and the latter is a realistic, albeit not a base-case scenario.
Hays thinks the rally in iron ore mining stocks is sustainable. Find out his pick of the iron ore majors here.
The 62% Fe iron ore price jumped 15.89% in overnight trading on Wednesday night to US$108.74 per tonne. That was the highest price since mid-July.
