Why is everyone so glum?
Things aren’t that bad are they?
Ah, it’s budget time. And a new government’s budget is almost always bad.
So we’re not surprised people are feeling a little blue.
And yet for investors things are looking pretty good.
Target 7,000 is well within sight…
If you’re a long time Money Morning reader you’ll know we have two targets for the S&P/ASX 200 index.
Our main target is for the index to hit 15,000 over the next three to five years.
It’s a bold call. But it’s a target set on sound theory based on the historic performance of markets during boom periods. And because of our view that interest rates aren’t about to rise anytime soon.
But we have a short-term target too. This target isn’t as outlandish. Here we’re betting on the Aussie index to get to 7,000 points by early next year. By early we mean January…or February at the latest.
That seems impossible given all the bad news stories floating around the Australian share market today. And yet, it may be possible after all.
Nine billion dollar profit in a bad economy?
While most investors focus on the terrible resources sector, many appear to have forgotten non-resources stocks completely.
Because away from the mines and drill rigs, things seem to be shaping up just fine.
Evidence for that is in Commonwealth Bank of Australia’s [ASX:CBA] latest quarterly trading report. The big bank reported a 16% net profit increase.
According to reports, this latest quarterly result should put the bank on target to lock in profits of $9 billion this year.
That would be the biggest annual profit for any Australian bank in history.
Whatever you may think of the banks and their business model, there’s no getting away from the fact that $9 billion would be a spectacular stash of profits.
But what about the mining sector? That’s dragging the market down, right? It is right now. But again, like the day before, yesterday another mining sector story caught our eye.
Just as the Chinese takeover offer for PanAust Ltd [ASX:PNA] suggested that a recovery in mining stocks is just around the corner, other news confirms that something may be in the air.
Finally, good news on debt
Yesterday Aussie mining services company Transfield Services Ltd [ASX:TSE] made the following announcement:
‘Transfield Services Limited is pleased to announce the finalisation of its debt refinancing strategy with the settlement of US$325 million of senior unsecured notes in the United States, maturing in May 2020.
‘In addition it has completed approximately A$400 million of senior secured syndicated bank facilities in various currencies, maturing in July 2017.’
That may not seem such a big deal. And your first reaction may be, ‘Wow, that’s a lot of debt.’
But considering that in this market it’s easier to draw blood from a stone than it is to get a banker to finance anything in the resources sector, this is a big deal.
It does two things for the company. First it extends the average maturity date for its loans out to four years. And second, it creates a lot more certainty in a sector ravaged by the resources and China’a economic slowdown.
Of course, this doesn’t guarantee anything. For all we know the finance companies supporting Transfield could be making a terrible decision. For all we know the resources stock bust could last another seven years.
But we like the news. Sure there’s an element of ‘confirmation bias’ in this. We’ve been talking up the potential of a resources rebound even before last December when we took control as publisher of the flagship resources investment advisory, Diggers and Drillers.
What resources crash? It’s already happened
But it’s hard to look at the resources sector right now and not feel excited by what we see.
A great company like Fortescue Metals Group Ltd [ASX:FMG] is still 56% below its 2008 peak. BHP Billiton Ltd [ASX:BHP] is 21.4% below its peak. Rio Tinto Ltd [ASX:RIO] is 59.6% below where it was in May 2008.
And that’s just the big stocks. PanAust [ASX:PNA] has fallen 63.7% since it hit an all-time high in 2008. It makes you think shareholders are in a tough position. Do they take the Chinese takeover offer while they can and thank their lucky stars? Or do they say no, and see this as the beginning of the boom that could result in PanAust shares taking off again?
That’s not the worst of it. Galaxy Resources [ASX:GXY] is down 96.9% since 2009. Lynas Corporation [ASX:LYC] is down 94.9% since it peaked in 2011. And Metgasco Ltd [ASX:MEL] has fallen 92.5% since its 2008 peak.
These aren’t isolated cases. Scan across any part of the resources sector and you’ll find similar — or worse — stories of stock price destruction.
This is why we laugh when we hear people talk about a coming downturn for Australian resource stocks. We’ve already had the downturn.
Now, that doesn’t mean prices can’t fall further, because they can. But what we’re saying is that on a risk/reward basis it’s the perfect time to start adding resource speculations back to your portfolio.
Don’t go crazy. But when this market turns you’ll want some exposure, as rebounding resource stocks can move quickly.
Cheers,
Kris+
PS: Resource stocks across the globe have taken a beating. Check out the Money Morning Premium Notes to discover whether that means it’s time to buy…and two heavily beaten-down Aussie miners that could take off if the market turns around…
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