For all the talk in the mainstream you’d think the Australian resource sector was dead.
It’s a mighty struggle for any resource firm to raise capital.
And to look at the performance of Australian resource stocks, well, it’s hard to find any sector that investors hate more.
We won’t say investors are giving their shares away, but on some days, it sure as heck seems like it.
And yet despite the negativity, resources are still by far Australia’s biggest export. So what gives?
You can see the breakdown of Aussie exports for yourself in this chart:
Source: Department of Foreign Affairs and Trade
Click to enlarge
Raw materials (such as gold, iron ore and oil) make up 55.7% of Aussie exports. Add in rural exports such as cattle and grains, and that’s another 10.8%. In other words, two-thirds of Australian exports come from the land or what’s under the land.
You’d think that would be something to cheer about. You’d think investors would use this resource dominance to their advantage. But right now it seems most Aussie investors would rather poke a finger in their own eye than buy resource stocks.
Success Despite Government Meddling
Look, from a macroeconomic point of view we get it. For the past five years we’ve argued that the government needs to cut red tape and minimum wage laws so other sectors of the economy can be more competitive.
Because mark our words, it’s not that Aussies are dumb. It’s not as though they don’t have an entrepreneurial flair. It’s just that government red tape handicaps Aussie firms when they try to compete in the global market.
And although successive governments have tried to handicap the resources sector as well (resource super tax), those firms digging and drilling for resources have mostly coped with the government meddling.
Why is that?
Well, it’s not that mining folk are smarter than biotech, technology, or manufacturing folk.
The simple reason is that if overseas firms want certain resources they have to go to whoever has the resources.
In many cases the choices are limited. Take iron ore. Right now there are three major global iron ore players – BHP Billiton [ASX: BHP], Rio Tinto [ASX: RIO], and Vale SA [BVMF: VALE5]. You can also add Fortescue Metals [ASX: FMG] into that oligopoly mix.
There are others, but not with the same kind of scale and market dominance as this crowd. That means when China wants to fill up on iron ore in order to make a bunch of steel to build gleaming new cities, it almost always has to deal with one of these four firms.
So in a way, the Aussie resources sector has flourished in spite of government interference. And if our bet is right, based on the market dynamics and Australia’s prime position, Aussie resource firms will continue to dominate the global market.
Investing in Resource Stocks is a Must for Aussie Investors
That’s why it’s so important that Aussie investors have at least some exposure to resource stocks.
That doesn’t mean putting every last penny into speculative and high-risk explorers. It just means making the most of and taking advantage of your box seat position.
We think about it this way: for Aussie investors not to own resource stocks is like an American investor not owning technology stocks, or a Saudi Arabian investor not owning oil stocks.
It’s just not natural.
And besides, there’s another reason why Aussies should invest in local resource shares…
Unlike most first-world financial markets where nearly all the stocks – even the tiddlers – have a broking firm or research house covering the stock, the Australian market is still woefully under-researched.
Obviously we’re trying our best to do something about that. But there are only so many stocks we can reasonably follow. That means more than three-quarters of ASX-listed stocks go completely uncovered.
While the tendency is to think such poor analyst coverage is bad news, the reality is the opposite. Here’s why…
Your Best Chance for a Ground Floor Opportunity
When there are a number of analysts following a stock, it’s hard to gain what we call a ‘knowledge advantage’ over those other analysts. They’ve all got pretty much the same access to the same data. And odds are they’re running the same analytical models over the companies.
That means their conclusions are broadly similar. They come to a consensus view.
But when there’s only one analyst, or no analysts following a company, well, that’s a different kettle of fish. It means few others are looking at the stock. And if that’s the case it means you have the real potential to get in on a ground floor opportunity.
That’s not possible with most other markets.
Of course, you won’t strike it lucky with every stock you find. Some stocks are trading for tenths of a cent for a reason – they’re just plain rubbish. But other tiddlers are true hidden gems.
If you can find them before the rest of the market cottons on, then you’re in with a chance of hitting the jackpot.
That’s your advantage as an Aussie investor. And what’s more, with resource stock prices still in the basement, there has rarely been a better time since early 2009 to selectively punt on Aussie resource stocks.
It’s time to do it, because if you don’t, the rest of the investing world will soon catch on and resource stock prices won’t stay this low forever.
Cheers,
Kris+
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