It’s hitting the market.
But not like a freight train.
That would be quick. It would put the market out of its misery quick-smart.
No. This is more like a slow-moving iceberg hitting the market.
Bit by bit it’s crushing everything in its path.
But surprisingly, it’s not having a huge impact on stock prices. It’s as though the market is pushing back.
What’s going on…?
We’re talking about the Australian resources sector.
We frequently cover this sector in Money Morning. There’s a simple reason for that. It’s one of the Aussie market’s most important sectors.
And it feels as though it has been falling non-stop for the past six years. Of course, that’s not true. Resource stocks had a great ‘recovery rally’ from 2009 through to 2011.
Since then it has mostly been nothing but down, down, down.
But there are signs — potentially — that things could be looking up for Aussie resource stocks.
Two resource stories caught our eye yesterday.
The first was news that Orica Ltd [ASX:ORI] reported worse-than-expected results. The stock price fell more than 5% on the news. It later recovered to be down just 3.9%. We asked small-cap analyst Tim Dohrmann if he had a take on it.
Orica isn’t really a small-cap, so it’s not in his wheelhouse. But Tim does know a thing or two about explosives, given his science background.
Here’s what he told us about Orica:
‘Back in March, Orica told the market that it would earn less money this half than it did in the same period a year earlier. Today, Orica’s managing director Ian Smith reminded everyone that conditions remain ‘challenging’…so much so that net profit fell by 7.8% to $242 million. Markets hate surprises of that magnitude for companies in the ASX 50. Hence today’s savage price action.’
Clearly when the market heard that earnings would be lower, it didn’t expect them to be that much lower.
But stop. A 3.9% drop? Is that really all that bad?
We’ve seen worse. And so have Orica shareholders.
If you look at the 10-year chart you’ll see the share price has been all over the place:
The message is simple: if you don’t like volatility, don’t buy Orica. If you’re happy with rapid ups and downs then Orica could be just your cup of tea.
Even after the drop, the stock is trading above $21, and has a 4.4% dividend yield.
In other words, if the resource sector was as dead as everyone claims, why did Orica’s profits only fall 7.8%? Why didn’t they fall 50%, 75% or even 100%?
Could it be the resources market isn’t dead? One other bit of news yesterday provided some proof of that. And it had resources analyst Jason Stevenson licking his lips at what could be coming next for the market…
Chinese state-owned Guangdong Rising Assets Management has made a takeover bid for Aussie-listed PanAust Ltd [ASX:PNA].
The company’s shares closed the day up 34.2% at $2.12.
Yesterday afternoon we asked Jason for his take on the PanAust story:
‘It’s a simple fact that the resource sector is out of favour. Money has chosen to flow into high yielding stocks and tech stocks instead. Since the beginning of 2013, the share price has drifted down from the $3.00 per share level.
‘The bid shows the true intentions of the Chinese — they want Aussie resources. Now that they’re cheap, they’re coming to get them.’
But again, isn’t the Australian resources sector supposed to be dead? Isn’t the China growth story supposed to be dead?
Even the Financial Times decided that yesterday was the day to call the end of the China boom…seven years after China’s stock market hit an all-time high:
‘China’s boom is over, but Beijing will avoid bust’
Well that’s comforting.
But if China’s economic boom really is over, how come one of the state-owned companies has decided to splash out $1.4 billion on an Aussie copper stock?
Could it be that the resource and China boom isn’t over? Could it be that yet again the mainstream press is doing what they always do — warning you about an event that has already happened?
It looks like it.
The hardest thing with investing is to know exactly when a market will turn. It’s almost impossible. All you can do make your best guess on when you think it could happen and invest accordingly.
It means figuring out which stocks will benefit most from the turnaround, and even which stocks could move first when the market recovers.
China’s stock market has been in a downtrend for seven years now. And yet the economy has continued to grow. It’s now almost within touching distance of taking over from the US as the world’s biggest economy.
China may not ever again grow at the 8% or 9% rate that it did a few years ago. But it’s growing and growing fast. As an investor you should recognise that as a tremendous opportunity.
After seven years of bad news for China and resources stocks, things are about to change.
Cheers,
Kris+
PS: PanAust has said they will reject the takeover bid. But is that really a good idea? Check out the Money Morning Premium Notes to discover what this means for investors, and how it could affect other Aussie copper stocks…