Buying Rio Tinto shares could be the ultimate contrarian investment

Rio Tinto shares are a bellwether for the broader global economy. Given all the growing negative economic sentiment, I think it might soon be time to buy.

| 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.

A senior group of friends enjoying rowing on the River Derwent

Image source: Getty Images

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.

Rio Tinto (LSE: RIO) shares have struggled to keep pace with the broader market recovery that has followed the pandemic lows of March 2020. This appears entirely logical. Rio Tinto is a mining company that provides commodities critical to economic expansion, such as major infrastructure projects. Given the headlines are dominated by talk of recession and persistent inflation, it does indeed seem to be a stock for me to avoid.

However, I think that by focussing on just two global indicators, I might be able to invest in this stock at a very favourable price while everyone else remains defensive.

Firstly, it’s all about the dollar

To remark that the present economic environment is confusing for investors would be an understatement. But there is one asset that has performed consistently, and that is the US dollar. Its rise has been relentless. Commodities are priced globally in dollars, so as the dollar rises, the price of those commodities drops. By extension, this impacts profits at Rio Tinto

Should you invest £1,000 in Rio Tinto right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rio Tinto made the list?

See the 6 stocks

Additionally, a strong US dollar is detrimental to those many countries that hold their debt in dollars. This means a larger proportion of their capital expenditure is spent on debt repayments rather than building projects. Hence large-scale demand for commodities remains soft.

Therefore, my working assumption is that if the dollar’s trend starts to show signs of a reversal, this would be beneficial to Rio Tinto.

And secondly, China

No country has absorbed more raw materials than China. Its inexorable growth has been breath-taking. But that all came to a halt during the pandemic and China’s uncompromising zero-Covid policy.

China is the world’s largest importer of iron ore, which makes up two-thirds of Rio Tinto’s operations.

In other words, all I need to do is to monitor any future weakness in the dollar and look for encouraging signs that China is building again. A combination of these two factors should, in theory, provide a significant boost to the Rio Tinto share price.

So when to buy?

In the past week the US Federal Reserve has hinted that interest rate rises may start to slow. This has already allowed some currencies to appreciate against the US dollar. Then over the weekend we hear reports out of China that Covid restrictions may be relaxed and steps will be taken to re-open the economy.

None of these factors are by any means a certainty. But I do believe that monitoring both Federal Reserve and China policy could prove advantageous.  Buying shares in Rio Tinto could then indeed provide me with a head-start on any economic recovery.

And if I buy the shares too early? With a respectable present dividend yield of 11.5%, that will certainly help me ride out any drawdown.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Michael Hawkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we 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

2 shares to consider as a new US deal could revive the UK stock market

Our writer investigates two major FTSE 100 shares that could enjoy a boost following a US tariff shift and possible…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

This FTSE 250 growth trust just loaded up on these 2 top S&P 500 stocks

Our writer noticed that this FTSE 250 investment trust has just scooped up a couple of quality US growth stocks.…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

This world-class FTSE 100 company’s expecting up to 10% growth in 2025

This is one of the most profitable companies in the FTSE 100 index. And right now, it’s firing on all…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10k invested in Phoenix shares 10 years ago would have generated passive income of…  

Shares in this FTSE 100 insurance giant have done poorly over the last decade. Harvey Jones wonders if super-sized passive…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

This brilliant FTSE income share just paid me £458 for doing absolutely nothing – I love it!

Harvey Jones is sending some love to high-yielding FTSE 100 dividend income share M&G today in return for it sending…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

Should I buy Palantir (PLTR) stock for my ISA in 2025?

Palantir stock's flying in 2025, having risen almost 60% already. Should Edward Sheldon take the plunge and buy the growth…

Read more »

Workers at Whiting refinery, US
Investing Articles

Drowning in debt amid falling oil prices, can the BP share price recover?

By far the worst-performing of the oil majors, Andrew Mackie assesses just what it will take to kick life back…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

As Cash ISA changes approach, is now the time to buy UK shares for long-term wealth?

Changes to the Individual Savings Account (ISA) could present an unexpected opportunity to try to get richer with UK shares.

Read more »