Market wrap: Is now the time to buy mining stocks?


In the last year, there has been strong demand from China for Australia's iron ore, resulting in the commodity rising from around $90 to a high of $218, which has also translated into strong rises for our Australian miners. The biggest gain this calendar year is Grange Resources, which is up 75.58% followed by Champion Resources up 45%, while BHP, which is our largest miner, has risen just 13.79%.

RIO has also risen 8.28% while Fortescue Metals has performed poorly, falling 4.72% this calendar year. So, will our biggest miners play catch up on their smaller counterparts and is now the time to be buying these stocks?

While China has imposed tariffs on other imports from Australia, it has stayed clear of iron ore, which indicates how important this commodity is to China and the growth of their economy in the future.

Given the billions our government rakes in from the sale of iron ore to China, no doubt they would not want China's demand for this commodity to slow, particularly given our ever-increasing account deficit.

That said, the price of iron ore has fallen in the last week, as the Chinese government seeks to strengthen its supply management in order to control demand from Chinese steel manufacturers and, as such, I expect to see continued short-term weakness in iron ore prices.

This will also translate into a pullback on the price of our mining stocks with BHP, RIO and Fortescue likely to fall together with some of the other miners. I anticipate that BHP and RIO will fall in the vicinity of 10 to 20% while Fortescue will likely suffer a larger fall. Following this, I believe these stocks will become great buying opportunities.

Best and worst-performing sectors this week

The worst performer over the past few weeks has finally turned around to be the best performer this week, with Information Technology up more than 4% followed by Consumer Discretionary up more than 18% and Financials just in the green. The worst performing sectors include Utilities down more than 3%, Materials down more than 1% and Industrials just in the red so far this week.

The best performers in the ASX/S&P top 100 stocks include Appen, which after falling more than 60% since last October has risen more than 25% this week. But before you get too excited and suffer a fear of missing out, this week's rise in Appen is far from confirmation that the down move is over. Xero has also risen strongly this week up more than 8 per, as has Aristocrat Leisure and Altium. The worst-performing stocks include Alumina, The a2 Milk Company and Macquarie Group, which are all down more than 5% while Qube Holdings is down more than 4%.

What's next for the Australian share market

Once again, the Australian stock market rose early only to fall heavily mid-week to its lowest level in six weeks. This indicates that the bearish sentiment we have been experiencing in recent weeks is still present. My expectation is that the All Ordinaries Index will continue to fall away over the coming weeks to 6,600 points and possibly lower. That said, given the way our market has been unfolding over the last 12 months, it could just as easily trade sideways for weeks, therefore, we need to be prepared for anything to occur.

In my previous report, I mentioned that the WAAAX stocks had suffered significant declines in the prior week but some have now traded up strongly this week although I caution investors jumping in believing they will get a bargain right now, as you may end up catching a falling knife.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.