Note to Australia: Buy Resources, Not Banks

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It will be important not to zag when you can zig in the coming months. Or zig, when you can zag, if you prefer. But what do we read in the paper today? Investors are being told to do just the opposite of what they ought to be doing! Imagine that.

“Analysts rate Westpac (ASX: WBC) a buy,” says Andrew Carswell in today’s Daily Telegraph. The bank told investors on Friday that it expected profit for the financial year to rise between six and eight percent. Let’s call it seven. But wait. It gets better.

Analysts at UBS raised the price target on the stock to $25, which is about thirty-one cents below where it trades today. Bold! Merrill Lynch says Westpac has the lowest risk, highest quality assets in the Aussie banking sector. It rates the shares a buy too. Zig.

But why not zag?

Is it not obvious by now-one year into the credit crisis-that banking is a terrible business when you strip away the fancy suits and big ties? It is subject to massive blowups and failures. When run prudently, of course, this does not happen. Banks are discrete in their loan-making, maintain adequate capital, and pay investors a dividend for their risk.

For banks to deliver faster earnings growth, they have to take more lending risks. This leads, especially at the tail end of a manic credit boom, directly to the situation you most want to avoid, banks that lower lending standards to grow the portfolio. It also leads, inevitably, higher rates of default.

Why on earth would anyone want to own a business that is structurally exposed to black swan events that destroy shareholder capital? Anyone? Beuller?

The ‘zag’ strategy would be to forget shares altogether until the banking crisis is sorted out globally, in which case you’d be primarily in cash. Or, you could buy shares of companies that are less prone to negative black swans but equally (if not more so) beaten down. Here we have companies like Worley Parsons (ASX:WOR) in mind.

Worley Parsons reported a 53% rise in full year profit today. It’s Australia’s best engineering firm. It’s got business in four different booms: energy, infrastructure, mining, and power. It has clients all over the planet. And as far as beaten down value, it’s down 33% year-to-date.

Here’s what we’d say for the moment: the beat down in the resource market is going to give you the best chance since 2003 to buy a portfolio of world-class projects at very good values. By the end of the year, a smart investor could end up with a buy-and-hold ten-year portfolio of the best resource and energy firms in the world. It’s an opportunity that probably won’t come again for quite some time.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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4 Comments on "Note to Australia: Buy Resources, Not Banks"

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Ross
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I bought at $38 and my guess is that there was director margin lending due the defensive voting rights play they put on. It seems to have stabilised and the opportunities look good. It is also a great currency play given market is slow to factor AUD weakness and meaning to individual stocks. I have Caltex too, again I bought too early and it is exposed to a downturn in avgas, but good for a lower AUD because they pass it on escalating import prices but bank a weaker currency on their exports.

Michael
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In terms of an Elliott wave analysis, Worley (WOR)has clearly made 5 waves up 1) waves I/II Oct/2003-July/04 2) waves III/IV Jun/06 Oct/06 and 3) wave V peak in Dec/07. This is th end of the cycle for WOR. Since wave 5 has extended, prices tend to come back to the third wave (which is at $20). This also marks the 61.8% Fibonacci retractment. In other words, it is all over for WOR for the time being.

Ross
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I hear you Michael. I am looking for stock that will carry through a bleak local 2009-2010 economic chapter and AUD dip. I’ve been interested in solid niche services businesses that don’t carry too much inventory but also not excessive debt (WOR only just scrapes in for me on the latter whereas WDS doesn’t yet make it). Good to see WOR exiting those power stations. Institutional money will hopefully be looking at the same or your comment has legs and I don’t.

rick e
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Hello can anyone tell me if and when is a good time to buy this stock

http://finance.google.com/finance?q=asx%3Ambn&hl=en

MIRABELA NICKEL LIMITED

It is nickel sulfide mine and a new mine and in Brazil

Thanks

wpDiscuz
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