The great rotation and why resources are looking attractive

Note: This extract was taken from Livewire Live 2024’s panel: 'The Good, the bad and the ugly' filmed on 17 September 2024.

There are some valuation extremes in the Australian financial sector right now. Just consider that Commonwealth Bank is double the valuation of JP Morgan, before you consider other macro challenges facing the financial sector more broadly.

L1 Capital's James Hawkins believes that passive flows from industry super funds are part of the story behind excessive financial sector valuations – after all, the Big 4 Australian banks plus Macquarie make up circa 25% of the S&P ASX 200, and a significant amount of Australians' $3.9 trillion superannuation money flows into buying the S&P ASX 200 index.

At the Livewire Live 2024 event on 17 September, Hawkins argued that global financials have had their run.

When you take into account valuations and the fact that many of the banks aren’t offering any EPS growth, such investments don’t make sense to a value investor, and he sees a rotation out of financials as being likely - it has perhaps already begun given events over the past couple of weeks.

By contrast, he currently sees value in the resources sector, a contrarian position given falls in commodity prices and slowing demand from China over the past year.

Hawkins’ top pick is Bluescope Steel (ASX: BSL).

“It’s cheap. It’s trading on a mid-teens PE. It’s growing its production through its North Star facility in the US. It’s going to be on a nearly double-digit free cashflow yield a couple of years out. Critically, it’s a very well-run company,” Hawkins says.

He points out that steel spreads in the US and Asia are at close to historic lows – a good time to buy for a contrarian investor – and there’s a backdrop of M&A activity in the sector. Despite the political tensions surrounding the upcoming Presidential election, he is bullish on the fact that 60% of Bluescope’s earnings will come from the US going forward.

To learn more about Hawkins’ concerns over financials and favourable views on resources, you can watch the full panel here.