It says a lot about 2014 that the best investment calls I made were to sell rather than buy.
Looking back, I did my best work in Spring when I sold energy giant BG Group and troubled pharmaceuticals company GlaxoSmithKline.
Glaxo has picked up lately, and I’ve been urging investors to get back in, but I’m in no rush to buy BG or the other two companies I abandoned in spring: BHP Billiton plc (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US).
These two mining giants have had a bad year, and 2015 looks set to be tough as well.
China On My Mind
I prefer to base stock decisions on company fundamentals, but in this case the macroeconomic picture made up my mind for me.
BHP Billiton and Rio Tinto are both strong, well-run companies with a renewed focus on costs and a clear edge over smaller rivals, due to diversification and deep pockets.
None of which counts if your main customer is cutting back.
Ghost Town
The Chinese infrastructure splurge was never going to last forever, but too many commodity investors acted as if China would consume as many of the world’s metals and minerals as the miners could unearth.
Brokers were dishing out ‘buy’ alerts for Rinto throughout the spring and summer (and many still are), even as cracks started to show in China.
Latest figures show a sudden contraction in Chinese imports in November, which hit the copper price. China is still largest importer in the world, but its appetite is waning.
Glut Allergy
My secondary worry, is that BHP and Rio have ben pursuing a dangerous strategy of ramping up production just as demand fell.
The subsequent glut has left iron ore facing its biggest loss in five years, and JP Morgan Chase & Co has just warned the pain will continue into 2017.
Both miners are playing a long game, forcing down the price to squeeze smaller, higher-cost competitors. You might buy into that long-term strategy, but it involves too much short-term pain for me.
BHP Billiton is down 23% in the last three months alone, Rio Tinto is down 10%. Over five years, they are down 22% and 8% respectively. To me, that looks like the end of an era, the Chinese growth era.
High Income
True, this has left BHP Billiton on a whopping 5.3% yield, while Rio yields 4.22%. But this high income isn’t quite enough to compensate for today’s low growth prospects.
My best call in 2015 looks nicely set for 2015 as well.
