By MoneyMorning.com.au
“Australia is set for a $112 billion infrastructure boom as the nation adds ports and railways to feed China and India’s appetite for coal and iron ore.” – Bloomberg News
As Bloomberg reports, this is to back-up the $232 billion going into Australian resources projects. All up, that’s $343 billion.
Surely it’s possible to make a buck or two from that.
There is -and funnily enough by taking advantage of fallen commodity prices. We’ll show you how in a moment.
First, look at this chart:
It’s the S&P/ASX 300 Metals & Mining Index.
As you can see, from early 2007 to mid-2008, the Index almost doubled. Over the next six months it halved. Then it took another two years to double again as the market recovered.
Yet since early last year, commodity prices have gone down again. In fact, one of Diggers & Drillers editor Dr. Alex Cowie’s favourite commodities – tin – has slumped 42% since March 2011…
“The London Metal Exchange warehouse stock is down to just 11,000 tonnes. That’s unusually low. Stock piles are down 40% in just three months. So I expect tin to rally from here, and my two tin stocks to go with it.”
So, with all those dollars gushing into the Australian resources industry, why the heck have resources stocks fallen?
It’s all to do with investor expectations.
You see, even though $343 billion is a lot of money, the market already knows about it. In fact, it’s partly why the market took off leading up to 2008 and again from 2009 to 2011.
In other words, it’s old news. So these dollars are already accounted for in company valuations. Add to that falling commodity prices and it’s bad news for commodity stocks.
The following chart of the CRB Commodity Index shows how commodities have done since last September:
The main reason the Aussie market failed to keep up with the rising U.S. market last year is due to falling commodity prices.
And this has obviously meant falling resources stocks.
But that’s the past. What about the outlook for commodity-based stocks. Well, this is where it gets interesting…
For instance, Agence France Presse reports the following from Mario Draghi, chief of the European Central Bank:
“We have seen several… positive developments. The more time that passes since we had the first three-year, long-term refinancing operation, the more we see signs that it has been an effective policy measure.”
This follows on from the comments we printed earlier this week from Federal Reserve Bank of San Francisco President, John Williams. He sees a “strong” case for the U.S. Fed to buy more bonds this year.
To us that means another spurt of commodity speculation this year. Prices have dropped. And although they could fall further, they’re at a level where we believe they’re worth a punt.
So, where should you stick your cash?
Our preference is still energy (oil and gas stocks) and strategic metal stocks (e.g. rare earths). These are genuine bull market stocks. And when commodity prices take off again, these stocks should move quickly.
But there’s another sector we’re seriously looking at too…
Not just because of rising commodity prices, but because of how much these stocks have fallen… and that’s the resources services stocks.
Those are the companies that don’t actually dig the stuff up or drill for things. Instead, they provide the back-up… the “tools of the trade”: drill bits, temporary accommodation, rigs, power infrastructure, and so on.
Stocks in this sector have taken a beating. And many are back to a level that makes them worth looking at again. Like all small-cap punts, these will be high risk.
But if as we expect, central banks print more, and China stimulates its economy again, it’s possible we’ll see another huge commodity stock boom this year. And after a big fall these are stocks that could benefit the most.
You wouldn’t want to bet your house on it, because the subsequent fall will be just as big. But if you set aside a small part of your portfolio for speculative punts, this could be where you’ll get some of the biggest returns.
Cheers.
Kris
P.S. So, when will the European Central Bank (ECB) print more money? In today’s other article “Prepare Your Portfolio for Eurozone Money Printing,” UK Money Morning Editor John Stepek gives his view on the problems facing the ECB. And the actions investors can take to protect themselves…
Related Articles
Special Report: Six Extraordinary Resource Investment Opportunities for 2012
The Only Gold and Silver Stocks to Buy
Why Fallen Commodity Prices Mean This Sector is Worth a Punt