By Alex Gluyas and James Thomson
The country’s largest superannuation fund is moving retirement savings out of Commonwealth Bank and into resources in a sign the market is rotating back towards an underperforming commodities sector.
The decision by AustralianSuper comes amid an iron price spike pushed along by Chinese efforts to fire up the world’s second-largest economy by supporting the profitability of steel mills and spurring them to buy more from major local miners, including BHP, Rio Tinto and Fortescue.
If sustained, the change in investor sentiment will help buoy a mining sector that has given way to financial services, and in particular CBA, as the driving force behind the S&P/ASX 200 and its bumper 12 months.
“We’ve rotated back into resources, which might be too early, but … that’s sort of what you want to do,” AustralianSuper chief investment officer Mark Delaney said, adding the fund had begun selling CBA shares three months ago. AustralianSuper oversees about $365 billion in retirement savings.
Investors have more broadly been piling into the mining giants this week, with the latest spike in the iron ore price helping to extend the rally. BHP jumped 5.6 per cent to $39.27 on Thursday, while Rio Tinto and Fortescue were both finishing up more than 1 per cent. Shares in the country’s largest bank fell 2.2 per cent to $179.69 on Thursday, making it five of the last six sessions CBA stock has fallen, its longest stretch of losses since March.
AustralianSuper has led the charge. After holding CBA at its full index weight for the majority of the year, the retirement savings giant said it started to go underweight three months ago. CBA accounts for 12 per cent of the ASX, and the fund’s holding is about 3 per cent below that.
A resurgence in the big mining stocks is welcome news for Australian fund managers who have been burnt by the astonishing rally in CBA’s shares over the past year. The stock has surged 40 per cent, despite recommendations from brokers to sell, because of demand from international investors and index funds, making it the world’s most expensive bank.
“There’s been an Australia exceptionalism type theme, where the Australian banks in particular were reviewed as a relative safe haven globally,” said Wilson Asset Management’s deputy portfolio manager Shaun Weick.
“CBA’s stock price was a clear momentum trade. Not only domestic, but global investors are starting to reassess whether China-exposed resources stocks are investible again.”
CBA’s lofty valuations had prompted many fund managers to underweight the bank or avoid it entirely, and instead stick with the sharemarket’s other blue chips, such as BHP and biotech giant CSL.
Iron ore price rebound
JPMorgan equity strategist Jason Steed said 33 of the 55 local fund managers he had surveyed held BHP and CSL in their top 10 holdings versus 28 who had CBA as a top holding.
The latest rebound in the iron ore price has helped, with the spot price of the steelmaking ingredient jumping 2.1 per cent overnight to a three-week high of $US95.65 a tonne, after China’s top leadership vowed to crack down on excess capacity and competitive pricing in the steel sector.
China’s pledges were delivered at a high-level economic meeting chaired by President Xi Jinping this week, Xinhua News Agency reported, highlighting the urgency of officials to boost domestic demand.
Lower steel output would improve the profitability at long-suffering mills, which could prompt them to buy more iron ore. Futures in Singapore added another 1 per cent to $US96.05 a tonne on Thursday, adding fresh momentum to the ASX’s rotation.
The news out of Beijing is a relief to commodity investors who have become increasingly concerned about a glut in China as the world’s largest exporters of the steel-making ingredient continue to flood the market.
Australia’s largest miners shipped a record volume of iron ore through Port Hedland in May, taking the volume this year to its highest level since at least 2010. Brazil, the second-largest iron ore exporter – behind Australia – also shipped a record volume of the steel-making ingredient for the month.
Recent shipping data suggested this trend extended into June. Iron ore shipments from Australia, including Port Hedland, totalled 18.4 million tonnes in the week to June 20, up from 17.8 million tonnes in the previous week, according to Marcura.
However, Westpac noted that inventories at China’s ports had not risen.
The bank’s head of commodity strategy, Robert Rennie, attributed that to China using recently weaker prices to build so-called “official” iron ore reserves, which will be held outside of port inventory data.
“That suggests we hold up above $US90 a tonne for now,” said Rennie.
Westpac believes prices will drop below that level once flows from Rio Tinto and Chinese steelmaker Baowu’s $US23.2 billion ($34.3 billion) Simandou iron ore project in Guinea begin in November.
But JPMorgan told clients on Thursday that the fresh wave of supply from Simandou is unlikely to hit iron ore prices until late next year.
“Iron ore price fears are overblown,” said JPMorgan’s head of metals and mining equity research, Lyndon Fagan.
“The derating of the miners on negative sentiment presents a compelling entry point to revisit the space.”
