If you are disappointed by the performance of the UK stock marketthis year thenheres who to blame: the big global mining companies.The troubles afflicting the embattled mining sector havecast a dark shadow over the entireUK plc. Without them, things would look a lot more impressive.
Mining Disaster
The latest batch of results from UK company resultswas decidedly upbeat, but only if you ignore the mining sector, according to the latest Profit Watch UK from The Share Centre.
Collective pre-tax profit on the FTSE 100 PLUNGEDby just over a third to 13.5bn, but that was primarily down to a collapse in mining profits, notably atBHP Billiton (LSE: BLT). Strip out the miners andpre-tax profits actually CLIMBEDa whopping 19.8% to 8.8bn.The figures also show that UK profits arerisingfaster than revenues, ascompanies turnrising sales into higher margins.
It was the 5% slump in the mining sector wot done it. Otherwise, most sectors enjoyed impressive double-digit pre-tax profit growth, The ShareCentre says.The outlook is most favourable for companies exposed to the strongly growing UK economy (although management at troubled supermarkets Tesco, J Sainsbury and WM Morrison may beg to differ).
Chinese Arithmetic
All of which is good news for the UK generally, but bad news for BHP Billiton and other FTSE 100 listed minersAnglo American (LSE: AAL), Antofagasta (LSE: ANTO), Rio Tinto (LSE: RIO) and of course Glencore. They enjoyed years of outperformance thanks to the rampant China growth story, and now they look set for years of underperformance as that story runs its course.
One of the best investment decisions I have ever made was dumping BHP Billiton a couple of years ago, while I was still in profit. I couldnt see howChina could carry on building at breakneck speed while the countryside was littered with gloomy ghost cities ofempty tower blocks. Minersracked up production to meet thisvoracious demand, leaving this notoriouslycyclical sectordangerously exposed to the inevitable slowdown.Excitable talk ofa 40-year commodity super cycle only served to reinforce the error.
Not-So-Super-Cycle
At some point, however, the cycle will turn again, as cycles do. Are we there yet? Chinese imports and exports fell in October, bymore than expected. The growing threat of an interest rate hike by the US Federal in December will heightenthe pressure on emerging markets.
Yetmaybe the future is more hopeful than many people think. China also posted a larger-than-expected trade surplus of $61.6bn in October, up from $60.3 in September. This will bolsteritsGDP growth rate, as Jan Dehn, head of research at Ashmore has pointed out. He reckons that Chinas high savings rate of49% gives the country enormous potential to grow through higher consumption, and notes thatthe Shanghai Compositehasregained bull market status after surging 20% from itslows earlier this year.
IfChinas revival is driven by domestic consumption itwont help the miners, which are still flailing. BHP Billiton is down 17% in the last month. Anglo American is down 24%, Antofagasta is down 12% and Rio Tinto down 9%. All four are a blight on the performance of the UK economy. At some point, they will rise again. That moment mayfinally be getting closer.
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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.
