Resources will drive the sharemarket – but there is little joy elsewhere: Gottliebsen

As the institutions look into their 2011 crystal ball they see higher stock market prices driven by the big and small miners and the groups that supply those companies.

By contrast there is no joy in banking, retailing and many other local areas of the economy, including the groups that supply the domestic building industry. If that’s the way things are going to be in 2011 then the obvious strategy is to raise the percentage of your portfolio held in miners and mining related stocks.

But a large portion of Australia’s retired population, including many of those with self-managed super funds, have been big investors in banks because they provide a high yield.

Banks occupy about 25% of the share index and those in retirement mode often have much more of their shares in banks, which they use to provide an income to live on.

It has been an investment strategy that has served Australians well for at least two decades. But as I explained yesterday, banks, in the next two or three years, are going to be commodity producers in much of their business, with lower margins as a result of the government’s measures.

That probably means that bank dividends will be held, but unfortunately the growth we have seen in banks will be much less and in time that will affect dividend rates.

Similarly, looking for growth among the domestic non-mining stocks will not be easy.

Retailers are suffering short-term from a pull back by consumers, but they also face the longer-term threat of online trading, as we’ve heard so much about recently.

Without doubt the biggest potential Australian growth stock of any non-mining group is AXA Asia Pacific. But the French look like buying our growth prospects for a pittance.

Companies like CSL and others in the medical and health area may also provide growth. Selection stocks in the IT revolution (like Seek) will be attractive, too. But the market is looking to the miners and their suppliers for growth.

The suppliers may do well in the medium-term because when the KGB interviewed Rio Tinto chief executive Tom Albanese he said there will be a substantial fall in iron ore and coal prices, plus many other minerals, sometime in the next few years.

Albanese couldn’t say whether the fall would take place, but it could be 2011, 2012 or 2013. The increase in supply and the likelihood of China curbing its demand would eventually take its toll on prices, but volumes would remain high, he said.

Rio Tinto believes that it is a low cost producer and its proposed expansion projects will be so economic that they will still generate big returns even if mineral prices fall.

Investors who sell part of their bank and retail shares will not only find they are in a more volatile set of stocks, but they will also have lower income.

Investment companies like Argo and Australian Foundation have been able to provide capital growth and income partly because of the wonderful performance of Australian banks and stocks like Woolworths. Now they face a much more difficult task.

This change may not be as apparent in coming months, but as 2011 rolls into 2012 it will become the major discussion point in the investment arena.

This article first appeared on Business Spectator.