Tuesday, 30 April 2013

May 2013 Sector Allocations: An opportunity in resources?

Readers of my expenditure tracker posts would know that I have seriously under-invested in the share market recently as it moves from one high to the next.  I am, at heart, a contrarian investor who loves stocks and other investments which are cheap because they are out of favour.  Those investments which should, at some point return to a normalised value.

As a result of this investment bias (make sure you know what your investment bias is) I have found it increasingly hard to put my money in the areas which I know well (that is, infrastructure, property and industrial share investments).

I confess that I have not paid a great deal of attention to resources stocks over the last few years.  The resources boom and their popularity in the market meant that I never really paid them much attention.  However I recently noticed that these stocks have not gone along for the bull run that the non resources stocks have had.

The chart below shows the relative under performance of the S&P/ASX 200 resources stocks (the green line) versus the broader S&P/ASX 200 index (the red line).  The difference is stark:

Some of the factors that have caused resources stocks to under perform include:

  • Concern about growth in China
    • China has been the big driver of the resources boom over the last few years and a lot of valuations were based on continued strong demand from China
    • Although there are signs that Chinese growth is moderating, the swings in share price on quarterly GDP numbers are truly staggering
  • A significant fall in the gold price
    • The gold price is one that I will never ever understand
    • There are so many things that drive it, from demand in India to the risk aversion in the market and people using it as a risk hedge
    • The fall in the gold price smashed gold stocks (understandably) however also seems to have dented confidence in other companies which have no gold operations whatsoever
  • A hunt for yield
    • There has been a real push for money to find a home in high dividend yielding stocks and investments, so much so that many infrastructure stocks trade at massive premiums to what their fundamental values would suggest based on the fact that they have a good yield
    • Resources stocks typically have much lower yields and the hunt for yield appears to have hurt these stocks in the process.
I know very little about modelling resources stocks

I know the absolute basics but unlike financials, industrial and infrastructure stocks I have no real experience or track record in modelling resource stocks.  However, the ~30% under performance in the last year is tempting me to enter the space.

I have decided to enter it by purchasing resources sector index funds which as I've posted about before, are a cheap and easy way to get broad based exposures to investments where you do not really need to evaluate the individual stocks themselves but you need to have a broader thesis (e.g. a currency one or a broader share market thesis).  

Sector index funds are remarkably expensive (remember to always check the MER) compared with broad based index funds.  I will post about the reasons for this soon, however they are the best way I could find to get exposure to this sector without reading up on and modelling a lot of individual companies.  

As always make your own decisions and seek your own advice - this is only what I am doing and you should not base your investment decisions on it.

Do you have a view on the resources sector?  I would love to hear about it below:

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