With the FTSE 100 sinking from the start of October there’s a lot of brilliant bargains out there waiting to be snapped up by ISA investors.
Could Rio Tinto (LSE: RIO) be one of these beautiful blue chips? On paper there’s certainly a lot to like about the diversified mining giant. With City analysts predicting a 24% earnings bump in 2019 it trades on a forward price-to-earnings ratio of 7.9 times, sitting a long way inside the benchmark of 10 times, which suggests irresistible value.
But this is not the only reason to get excited as, at current prices, Rio Tinto also carries a monster 8.7% dividend yield for 2019, one which cuts the Footsie forward average of 4.5% to ribbons.
Fragile China
I’m certainly not tempted to buy into the iron ore giant at these prices, however. Rio Tinto’s cheap, sure, but it’s cheap because market makers are fearful over how the slowing global economy will impact commodities demand in 2020 and possibly beyond. And there’s a couple of pieces of data in the past 24 hours that have worsened the picture considerably.
First up came critical GDP data from raw materials glutton China which showed its economy grew 6% in the three months to September. This was down from 6.2% in the second quarter, missed the forecast of 6.1%, and represented the worst reading since 1992.
Economic expansion for the Asian powerhouse has long been slowing, but these fresh figures show the strain that the fight over trade tariffs between Washington and Beijing is causing. And this problem remains a long way off being resolved.
One final thing to be concerned about is the failure of People’s Bank of China monetary policy to arrest the sharp slide. The steady stream of cash injections provide some support but they haven’t dampened concerns over the scale at which the domestic economy is dropping.
Car crash
The second reason to worry for the likes of Rio Tinto comes in the form of a chilling trading update from automotive giant Renault on Friday. In it the French manufacturer axed its previous prediction that sales would remain flat this year, and warned that these could actually fall by as much as 4% in 2019.
The news adds to the sense of panic across the car industry, with a raft of other major manufacturers from Toyota and Volvo to Ford and Honda, all warning of falling sales in recent weeks. The impact of changing emissions standards in Europe is adding to the pressure created by the broader slowdown in the global economy and this exacerbates concern over steel demand looking forward – a hefty 12% of all steel is used in the manufacture of autos.
Reflecting the toughening economic landscape, City analysts are expecting earnings at Rio Tinto to reverse in 2020 (a 12% decline is currently being forecast). But this is not the only reason to worry as the number crunchers are expecting the full-year dividend to be cut by around 20% as well.
Rio Tinto’s share price has dropped 20% since the start of July and it’s not hard to envision it continuing to fall. For this reason I’m happy to keep on avoiding it.