\n\tBy Greg Peel<\/p>\n
\n\tIt is an unfortunate truth for the Australian investor that outside the banks and Telstra ((TLS)), the big local resource stocks represent a big chunk of the index. This means stocks such as BHP<\/span> Billiton<\/span> ((BHP<\/span>)), Rio Tinto ((RIO)), Woodside ((WPL<\/span>)) and Newcrest<\/span> ((NCM<\/span>)) become automatic inclusions in any index-tracking portfolio and often simply “must haves” in any Australian-based portfolio. Dropping down from the super-caps, there are plenty more miners and energy companies filling out the ranks of the ASX<\/span> 200. To invest in Australia is to invest in mining.<\/p>\n \n\tThis is a problem when the miners are not performing, or worse still, underperforming. FNArena<\/span> has warned for some time now that BHP<\/span> and Rio would trade “ex-growth” in FY12-13<\/span> at the least, as both companies set aside enormous sums for the development of new long term mega-projects at a time the prices of bulk commodities and base metals offered little in the way of upside strength. We know that both companies, and others, have since reined in their immediate capex<\/span> plans but this in itself is a response to a more rapidly slowing China than had been anticipated twelve months ago.<\/p>\n \n\tIndeed China's fairly dramatic economic slowdown in the first half of 2012 has been the dominant factor in metals prices falling quite steeply over the period, and that's before we even throw Europe into the mix (which of course has a flow-on impact on Chinese export demand as well as a general “risk off” influence). More concerning for investors, particularly in Australia, is that resource sector stock prices have fallen even further than commodity price falls would suggest, leading this big chunk of the local market to underperform both commodity prices and the index, and particularly to underperform defensive stocks such as the aforementioned Telstra and other less exciting but safe yield plays.<\/p>\n \n\tIt has not been a good half for those who believe a stock like BHP simply must be included in a share portfolio (which includes every resource sector analyst in the country).<\/p>\n \n\tCould the tide, however, be about to turn?<\/p>\n \n\tI'm not talking about Greek election relief bounces and other short term movements, and any discussion comes with the caveat of “unless Europe plunges into crisis yet again”, I'm talking about the more medium term picture of the second half 2012 and into FY13. Equity strategists at the world's major broking houses are beginning to suggest the time is approaching for a switch out of your overvalued defensives, which are limited in their ongoing upside, and into beaten down miners, which offer a good deal of recovery upside (noting caveat).<\/p>\n \n\tCiti's strategists note Chinese data appeared to stabilise in May after several months of clear slowdown. The investment numbers are still very low by Chinese standards but while it may take a month or two yet to be certain, there are some positive signs. Chinese imports of copper – the benchmark base metal – hit 420,000t in April, up from 375,000t in March. While China is very handy at taking advantage of lower price opportunities (often causing later destocking concerns), Citi believes the major driver was inventories shifting from the US to China in anticipation of stronger Chinese demand in the second half as Beijing eases off the brakes.<\/p>\n \n\tDeutsche Bank's strategists are on the same page. Deutsche's economists are expecting policy easing to spark stronger Chinese economic growth in the next two quarters compared to the previous three, and cite improvement in leading indicators as support for such expectation. The strategists note Australian mining stock underperformance has meant a sector trailing PE of 8x which is a 30-year low outside the 2008-09 global recession.<\/p>\n \n\tOn the wider scale of things, Deutsche points out that when measured against the benchmark of US GDP per capita, China has now reached the level of Korea and Taiwan in the 1970s and Japan in the 1950s. While this revelation will not prevent the ebb and flow of Chinese economic performance over time, it's always a nice reality to consider whenever China-based fear heightens once more.<\/p>\n \n\tLike Citi, Deutsche is not about to rush in just yet from the short term perspective. Citi wants a couple more months of confirmation and Deutsche warns developments in Europe or the US may yet stall any share price recovery, so give it a couple of months.<\/p>\n \n\tThe UBS strategists are also among the “resource stocks oversold” school, albeit are advocating only a “modest tilt” toward the sector within a portfolio. Safety looks relatively expensive, says UBS, which is a reference to defensives, but while cyclicals look cheap we are unlikely to see another 2009-style, global stimulus-induced rally in the strategists' view. <\/p>\n \n\tUBS maintains a Model Portfolio, and they have this week removed Leighton Holdings ((LEI)) and Toll Holdings ((TOL)) in favour of explosives producer (and thus mining-driven) Orica ((ORI)) and LNG leader Oil Search ((OSH)) in the cyclicals space.<\/p>\n \n\tIt is interesting to note Macquarie's “Marquee Ideas” portfolio is currently heavily weighted towards cyclicals. Of fifteen stocks, only GPT Group ((GPT)) and SAI Global ((SAI)) could be considered defensive while Origin Energy ((ORG)) has a bit of a foot in each camp. Macquarie is placing some faith in the Australian consumer, outside of resources and resource services stocks. <\/p>\n \n\tAmong the resources picks are Newcrest and Rio, the aforementioned Origin and the smaller Alacer Gold ((AQG)). However Macquarie has today added Whitehaven Coal ((WHC)) to the list.<\/p>\n \n\tIn relation to the above improving views on the resource sector, Macquarie suggests a secondary reason to buy Whitehaven is M&A related (Nathan Tinkler leading the charge), but primarily weakness in thermal coal pricing is dragging on the stock. The analysts believe there is now too much of a “valuation gap”.<\/p>\n