The Pain Isn’t Over Yet For BHP Billiton plc And Rio Tinto plc

Investors in BHP Billiton plc (LON: BLT) and Rio Tinto plc (LON: RIO) must brace themselves for more pain before they make any substantial gains, says Harvey Jones

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There is a general feeling that the worst is over for BHP Billiton plc (LSE: BLT) (NYSE: BBL.US) Rio Tinto (LSE: RIO) (NYSE: RIO.US), as commodity price falls bottom out.

BHP is up 5% in the last month, while Rio is up more than 8%.

Many investors will be tempted to hop on board, before a full-blown recovery is under way. At today’s prices, I have some sympathy with that go get ‘em attitude.

Trading at 1,571p, BHP is 25% off its 52-week high of 2,102p. And at 2,972p, Rio is down 15% from its year-high of 3,530p.

So if this is a sector that you want more exposure to, today’s discounted valuations could make a promising entry point. Just don’t expect a sudden rebound from here.

China Cracks

The main reason for the shake-out are the troubles afflicting BHP and Rio’s biggest consumer, China. Its economy is growing at the slowest pace for six years, with year-on-year GDP growth up 7% in the first quarter of 2015. Many economists reckon the real figure is lower than that. They prefer to follow power output instead, and that fell 3.7% in the year to March.

The other concern is that what growth there is has only been sustained by stimulus from an increasingly desperate government. As elsewhere, this has done more to drive up asset prices than to fuel real economic activity. Industrial output and real estate investment have both fallen to their lowest levels for at least six years. And the IMF expects growth to continue slowing.

Naturally, that spells bad news for BHP Billiton and Rio Tinto.

And although QE appears to be driving a eurozone resurgence, disappointing growth figures in the US and UK suggest the global economy isn’t about to spring back into life. A further rise in the dollar would also hit demand. 

Iron Men

Copper may have found a floor for now but iron ore continues to fall, down from $140 a tonne to around $54 over the last year. BHP and Rio’s policy of maintaining production, presumably in the hope of driving out smaller rivals continues, and it appears to be having some success, with Australian producer Atlas Iron recently suspending output.

But even the big two are pulling back, with BHP recently postponing its iron ore project in Port Hedland, and Rio deferring its Silvergrass mine until next year.

Have they also seen the writing on the wall?

Pain And Gain

The most compelling reason to buy both these stocks now are the yields, currently 4.65% and 4.13% respectively.

The valuations both look attractive as well, with BHP and Rio trading at just over nine times earnings. So the temptation is obvious. But you should still brace yourself for more pain before the outlook starts to brighten.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »