If your portfolio contained only shares in BHP Billiton (LSE: BLT) and Standard Chartered (LSE: STAN), you’d have lost about 40% of your money last year.
Both companies were suffering for very similar reasons. The prices of iron ore, copper and oil all fell much further than expected as the 2005-11 mining boom continued to unwind.
Much of this unwind was driven by slowing growth in China. For miners like BHP, it was suddenly necessary to cut costs and spend much less on new projects than in previous years. At Standard Chartered, investors became nervous about the risk of big losses on loans to commodity-related businesses.
Like many investors, I underestimated how far the price of oil and other commodities would fall. My own shareholdings in both BHP and Standard Chartered are below water. The question now is whether I should buy, hold or sell.
BHP Billiton
In my view, BHP remains one of the top quality choices in the big cap mining sector. The firm has a good selection of low-cost iron ore and copper assets, plus some decent oil and gas fields.
BHP’s balance sheet is relatively strong with net debt of about $25bn and only $3.2bn of debt due during the current year. Analysts’ forecasts suggest that BHP will report a post-tax profit of $2.1bn for the year ending on June 30, roughly the same as last year.
If 2016 proves to be the low point of the commodity cycle, then BHP’s continuing profitability is encouraging. While the tragedy at BHP’s jointly-owned Samarco mine in Brazil has increased the likelihood of a dividend cut in my view, I’m not overly concerned by either risk.
The cash costs of the Samarco disaster are likely to be manageable and spread over several years. BHP’s current forecast yield of 10% means that even if the dividend is halved, the shares still offer a potential yield of 5% at current prices.
I believe BHP shares are a buy below 800p.
Minimising its risks
I’m slightly less sure about the outlook for Standard Chartered. Big banks are so complex that it’s very hard for outsiders to form an accurate view of their earning potential.
Standard’s recent £3.3bn rights issue raised valuable extra cash for the company. New chief executive Bill Winters aims to streamline the business and focus on more profitable and less risky areas of business.
This restructuring is meant to reduce the group’s risk-weighted assets by more than $100bn. What we don’t know yet is how costly it will be for Standard Chartered to exit some of its unwanted businesses.
It’s also not clear whether losses from bad loans will continue to rise. Losses from bad debts rose from $1.4bn to $2.9bn during the first nine months of 2015. In my view, there’s no way for private investors to understand whether things are likely to get worse.
However, Standard Chartered shares now trade at a 40% discount to their book value and offer a 2016 forecast yield of 3.1%. In my view, a lot of bad news is already reflected in the bank’s valuation. I think that 2016 could be a good time for investors to cautiously increase their exposure to Standard Chartered.