Some people think you should buy miners becasue they are “cheap“:
Australia’s big miners are cheap on a global basis and may drive the S&P/ASX 200 index as high as 8,000 points in the second half of 2021, according to Mike Aked, Director of Research for Australia at Research Affiliates.
While banks have surged this year because of very low interest rates and the resulting rise in property prices Australia-wide, he says they are expensive on a global basis.
“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,” he says.
No argument from me on banks. CBA is a bubble. The others look OK.
But miners being cheap is not a good argument to buy them. The reason is that miners are usually cheap when commodity prices are high and that’s when they are most vulnerable to the same prices falling away, which usually happens through a trap door.
Today is shaping as one such example as China tightens monetary and fiscal policy plus the global inventory super-cycle tops out.
BHP tells the tale. The best time to buy it in the past few cycles was in 2004, 2009 and 2016 when its valuations were hugely stretched. The worst times to buy it were when its forward P/E fell below 10x in 2008, 2012 and…2021?
In short, miners on low valuations are very often value traps.
