It's tried-and-true wisdom on Wall Street that yesterday's laggards are often tomorrow's outperformers. That's exactly what's shaping up for the energy, metals and basic materials sectors. These stocks were laggards in 2011, but now they look to be in an ideal situation to deliver gains as the global economy picks back up.
To recap, the Basic Materials Index in the S&P 500 was the second-worst performing industry group in the United States in 2011, with only financials performing worse. Concerns about global economic growth were the main driver of that weakness. In particular, investors fretted that economic conditions in emerging markets such as China and India would sour because authorities in those countries raised interest rates and tightened bank reserve requirements in an effort to quell inflation. The greatest fear was that these tightening measures would work too well, pushing the world's growth engines into a hard landing.
But that's changing.
First, consider a few shocking statistics. For decades, the United States was the world's largest source of copper demand, and as recently as 2000 accounted for about 16% of global consumption. But in 2002, China finally consumed more copper than the United States. Today, China dominates consumption, accounting for a commanding 40% global market share, compared with less than 9% for the United States.
China is also the world's largest steel producer and the world's largest consumer of iron ore, the key raw material used to make steel. China has significant domestic iron-ore resources, and for many years the nation's import needs were modest. But not anymore. China's building frenzy has depleted reserves, and now the nation's import dependence has jumped from 51% of demand in 2004 to as much as 70% this year.
Global metals markets are heavily leveraged to economic news out of China. Any sign slowing growth for the Chinese economy is enough to send metals and mining stock prices tumbling. With the Chinese government actively trying to slow down the country's growth in 2011 and investors fretting about a negative spillover from the E.U. credit crisis, metals faced a poor macroeconomic backdrop.
But 2012 looks to be a year of recovery.
Inflation in China, India and other emerging markets finally began falling in the second half of 2011, taking the pressure off authorities to slow runaway growth. In fact, Chinese authorities appeared to perform an abrupt about-face in the final weeks of last year, cutting bank reserve requirements in an effort to prevent growth from slowing too quickly. Rhetoric out of China since late 2011 suggests that the government plans more pro-growth moves to make for the first half of 2012.
The data are already improving. China's widely watched Purchasing Manager's Index (PMI) for manufacturing jumped to 50.5 in January, its second consecutive month above 50, a level that indicates expansion in manufacturing activity.
As fundamentals improve, many metals companies are looking like attractive buy candidates. After last year's rout, the sector is trading at its most attractive valuations since 2009 and early 2010, when the global market was still reeling from a vicious recession and global credit freeze. Better still, many of the world's best-positioned metals mining firms pay out large dividends because last year's broader stock decline has pushed up yields to tempting levels.
To identify the best high-income raw materials stocks, it's a good idea to look overseas. If you only look at shares of U.S. firms, you're limiting your options. Many global materials giants carry high yields and trade as American depository receipts (ADRs) on U.S. exchanges that are easily tradable for individual investors.
I recently ran a screen of stocks looking for non-U.S. companies in the raw materials, mining and oil & gas production industries with yields greater than 4.5% and shared the results with readers of my High-Yield International newsletter. To make sure the screen candidates are easy for U.S.-based investors to purchase, I limited my screen to companies that trade as ADRs in the United States and have an average daily trading volume of at least 50,000 shares in the past 60 days.
Here's what I found...
Risks to Consider: As I mentioned earlier, the materials sector can be volatile. Any renewed worries about inflation in China or India could send shares lower. That doesn't look probable at this point, but it's worth keeping in mind.
Action to Take --> Any of the stocks in this table are good candidates for further research. A couple of the oil producers in this table are already members of my High-Yield International portfolios, while Norway's Statoil (NYSE: STO) is this month's International High-Yield Security of the Month.
[Note: To learn which stocks from this table are in my portfolios -- and get access to my latest recommendations, go here to learn more.]