Investors should position their portfolios accordingly to reflect that big and cheap Australian miners are expected to overtake banks, which are expensive on a global basis, in 2021-22, according to Research Affiliates.
Australian financials were priced at a 37% premium to their global competitors, while resource securities were trading at a significant discount, at over 50% and in 2021 the surge in financial companies’ value was driven by very low interest rates and the resulting rise in property prices Australia-wide, the manager said.
“As the property stimulus fades, another sector must take leadership if any further increase in the market is to occur. Resource companies are well positioned to take this lead as news of domestic and global inflation should continue to rattle markets until the end of 2021,” the firm’s director of research for Australia, Mike Aked, said.
“Because our financial companies are expensive on a global basis and our miners are cheap, we would expect that Australian resource companies are much more likely to drive our local market higher over the second half of 2021 to fresh all-time highs over 7,400, possibly rising to as high as 8,000 given the momentum in commodity prices. We would position a portfolio accordingly.”
Aked added that investing in a portfolio of cheap resource names that were positioned well for rising inflation seemed a more robust investment strategy than investing in expensive financials, which would need continued property price increases to justify their price.
In 2021, Australian resource securities lagged the broader share market, up only 13.4% at their most recent peak on 10 May 2021, and prices were falling since.
In comparison, financial companies surged 23.7% this year to their latest high on 17 June, 2021.
“From here, resource companies should benefit from rising inflation more so than financials because their share prices are leveraged to the price increases of their biggest asset: metal and other resources still in the ground. We are seeing strong gains in commodity prices with constraint supply and the continuation of the global economic recovery pushing up prices. Inflation treats resource companies well, unlike financial assets,” Aked concluded.