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The recent turmoil in the markets has been tough on all assets – which is one of the most worrying aspects of the upheaval.
One of the main justifications behind the idea of holding a wide range of different asset types in your portfolio is so that when something goes down, something else goes up. But now, property, stocks and even gold are rising in tandem – and falling too.
Commodities, one of MoneyWeek’s favourite sectors, have also been hit hard, which has seen mining stocks in particular among the worst hit by the recent sell-off.
But it’s certainly not time to turn negative on the sector yet…
Mining stocks have been battered over the past week or so. For a start, their fortunes are intricately linked with the fortunes of China’s economy – so as soon as traders caught sight of the sell-off in Shanghai, the mining stocks were bound to follow amid fears of a Chinese slowdown.
Also, investors have been bailing out of risky assets, which has taken some of the speculative heat out of metals prices in particular.
However, despite the blip, we find it hard to believe that demand for metals and soft commodities in particular, is suddenly going to collapse. Commentators have been warning of a collapse in China’s growth for a long time now, but the scale of the urbanisation and industrialisation challenge facing the country is huge, and has years if not decades to go.
And it’s not just China – as David Fuller of Fullermoney frequently points out, people in emerging and developing economies want what we now take for granted – fridges, cars, air-conditioning, a roof over their heads. And the good news is that the political climate in most of these countries is now well-disposed to capitalism and the idea of people making money – they may not be sure of the best way to go about it, but the deliberately anti-wealth creation policies of Communism don’t look likely to make a comeback any time soon.
If all those people want to boost their standard of living, that’s going to take a lot of raw materials. So while individual economies will certainly have their ups and downs, and there will probably be long corrections and periods of slower growth or even stagnation, we believe that the idea of a commodities super cycle holds water.
And that’s good news for mining stocks. As if to prove it, Xstrata, now the world’s fourth-biggest mining group, came out yesterday with an impressive set of full-year results. Full-year profits doubled, while its final dividend was increased by a third, meaning the total dividend for the year was up by nearly 50%.
Chief executive Mick Davis was bullish on the outlook too. “While it is unlikely that average prices for base metals will continue to rise at a similar rate to 2007, the fundamental outlook for the industry remains positive.
“We’re still suffering from a lack of investment in the 1990s and it will take some time for projects to come on board.”
But even if prices fall back, miners are still trading on well-below-average multiples compared to their blue-chip peers in the FTSE 100. As James Quinn in The Telegraph’s Questor column points out. “Mining stocks are valued on the basis that prices are unsustainable, so every indication that they may stay higher for longer puts a floor under the sector’s lowly rating. [Broker] Numis’s forecasts put Xstrata on 10 times earnings this year and 13 times in 2008. But if current prices hold those multiples fall to a derisory 7.4 and 6.7. Reason enough to buy.”
We certainly wouldn’t disagree with that. Other mining stocks we’re fond of include Rio Tinto and BHP Billiton. In fact, MoneyWeek regular Tim Price picked BHP as his one ‘must-have’ stock for our five-stock pension portfolio – to read more, and find out which other four stocks our experts picked, subscribers can click here: Five shares to help you retire rich
And if you’re not already a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the wider markets…
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In London, the FTSE 100 ended yesterday 79 points higher, at 6,138, as stocks were boosted by gains on Wall Street and positive broker comment. Energy supplier International Power was the day’s biggest gainer, climbing over 6% on the back of rising energy prices and acquisitions. For a full market report, see: London market close
Across the Channel, the Paris CAC-40 closed up 48 points at 5,433, whilst the German DAX-30 was 60 points higher, at 6,595.
On Wall Street, tech stocks led a market rally yesterday, with the Nasdaq – which bore the brunt of last week’s losses – climbing 44 points to end the day at 2,385. The broader S&P 500 was 21 points higher at 1,395. And the Dow Jones Industrial Average made triple-digit gains, ending the day 157 points higher at 12,207.
In Asia, the Nikkei closed lower again today, falling 79 points to end the day at 16,764 as investors remained nervous despite the strong session on Wall Street.
Crude oil was slightly higher this morning, last trading at $60.86. Brent spot was at $60.82 in London.
Spot gold was last quoted at $644.50, off an intra-day high of $638.25.
And in London this morning, troubled broadcaster ITV announced a 19% fall in pretax profit as advertising revenue fell 8%. However, results were slightly ahead of analysts’ expectations. ITV shares had fallen by as much as 1.6% in early trading.
And our two recommended articles for today…
How to be an ethical investor
– Some say that you can be an ethical investor or a sucessful investor, but not both. By sticking to companies with a strong sense of corporate social responsibility or low environmental impact – or by avoiding vice stocks – you will limit your choices, but you could still turn a profit. If you want to start investing in ethical stocks and funds, find out where to start by clicking here:
How to be an ethical investor
Generate profits from nuclear power
– And sticking with the ethical theme, nuclear power has been causing controversy recently: is it really the best solution to the climate change problem? Despite the critics who say the risks are still too great, nuclear power has been undergoing something of a revival. For the stocks most likely to benefit – and a nuclear fuel to rival uranium – read:
Generate profits from nuclear power