Rock steady start
At the start of this year, I was thinking of dumping my stake in BHP Billiton (LSE: BLT) (NYSE: BBL.US). Along with Tesco, it was one of the most disappointing stocks in my portfolio. But I’m glad I resisted the temptation to bail out. Because BHP Billiton has just had a surprisingly good week, and that suggests the future may be brighter than I feared.
A week isn’t a long time in investing, but I’m still glad BHP Billiton has done well, rising 6% in that time. The fun started late last week, on a rave notice from Citigroup. It said the mining sector was due for a rebound, and lifted its rating from ‘neutral’ to ‘bullish’, its first positive outlook on the sector in three years. Any slowdown in China should be offset by growing demand from US and Europe, it said, while weak commodity currencies are “providing a fillip for the miners”. Citi labelled BHP Billiton a key buy in the mining sector, upgrading the stock from ‘neutral’ to ‘buy’.
China is definitely on my mind
As if that wasn’t enough, David Madden at IG said the mining sector is now “worth its weight in gold”, as the only sector propping up the market. “The recent cooling-off in the commodities supercycle has meant that natural resource stocks are now undervalued,” he said. It’s amazing how market sentiment can spin on just a few warm words. And surprising, given worries about the Chinese credit bubble.
Q4 Chinese GDP growth figures look healthy enough at 7.7%, down from 7.8% the previous quarter. Markets expected worse. I still suspect China will pay the price for its breakneck credit expansion over the past five years. Investment in infrastructure looks set to fall this year, as the government belatedly seeks to tighten credit conditions, and that would be a blow for mining stocks.
But BHP Billiton’s first-half results were positive, with chief executive Andrew Mackenzie heralding a “strong operating performance” and “strong momentum” going into H2. Iron ore and metallurgical coal output were particularly robust, iron ore production hit a record high of 97.8 million tonnes, and all production is on schedule and budget. Petroleum, its second-biggest division after iron ore, did fall 4%, but that was in line with expectations. The stock held firm in early trading.
I no longer plan to sell BHP Billiton, although lingering concerns over China make me reluctant to top up my stake. Citigroup and IG, however, have no such qualms. If you believe the global economy is recovering, this stock could be a good way to buy into it.
