Global lending shifts lift resource stocks

A look at how global lending shifts, government deficits and bank balance sheets are feeding through to resource stocks – and why it matters for investors.

If you tune into the latest news, you’ll know APRA recently put a limit on the amount of higher-risk property borrowers the Aussie banks can take on. Here’s the thing… globally, that makes Australia an outlier right now. The trend overseas is for regulators to make it easier for their banks to lend. I’m speaking generally, not specifically to property.

What regulators are doing overseas

Case in point is the UK right now. The Financial Times reports that the Bank of England is going to announce a plan to ease its capital requirements this week. This follows on from US moves to remove similar rules. The particulars are less important than the effect: banks can lend more. This, generally speaking, is a good thing for economic growth.

UK and US governments put these regulations on their banks in the wake of the GFC… so that it didn’t happen again. Rarely do things in financial markets happen in isolation. Now the GFC concern is not the issue. Both governments need help to finance their deficits, so they’re taking the restrictions away. The banks can help them.

By loosening these regulations, it allows the banks to buy more government debt. Currently, the US government is funding a larger proportion of its spending by issuing short-term “bills” that only have a one-year duration. This lowers the interest rate on the debt, but means it needs to be rolled over faster than longer-term durations like 3, 5 and 10-year issues. Short-term bills are more appealing to banks than those bonds with longer-term duration because of the way they balance their books.

The UK government is now moving to do the same thing. The Financial Times reported on 28 November:

“The UK has already been shortening the maturity of its debt – which at roughly 14 years on average is far longer than that of other countries – in a bid to lower its interest bill as demand for ultra-long-term bonds from pension funds wanes. Analysts said an expansion of the bills market is likely to accelerate that process.”

Why it matters for growth and inflation

This may sound dull, but it is very important. Banks expand their balance sheets by issuing new credit. That means the banks are helping to finance government spending with newly created money. It also points toward strong economic growth as the ‘real’ economies in the UK and US pick up. This government spending will hit and lift the demand for goods and services.

There’s a catch. It also runs the risk of stoking inflation as the money supply expands. This could pressure interest rates up in 2026 and 2027 because the fiscal spending is so high.

Globally, the wildcard here is China. It said back in October that it would maintain a “loose” monetary policy but is still struggling with a deflating housing market and weak consumer spending. There is expectation they will resort to further stimulus to revive both.

What this could mean for investors

How does this matter for your investment strategy? One idea is to keep a close eye on the resource sector. Strong growth is good for demand, while supply may be constrained by years of underinvestment.

The signs of this may already be there. Look at the chart below. The recent sell-off barely budged the ASX 200 Resource Index, while the banking one has dipped sharply. This inverts the usual perception of the banks being less volatile and less risky.

I can’t promise it will stay that way. We did see ANZ (ASX: ANZ) on Tuesday (02/12) say they no longer expect rate cuts for an extended period, at least in Australia.

How resources have behaved historically

I was also interested to see the Australian Financial Review cite evidence that, historically speaking, resource stocks were the most consistent outperformers in the year before the RBA’s first rate rise. The article adds that miners generally benefit from strong economic growth and act as a hedge against rising inflation. A further benefit is they’re less vulnerable to any spike in bond yields.

Of course, resource stocks can be very volatile and unpredictable. But so far resource prices this year are up strongly. My colleague Henry pointed out last Thursday that “lithium is up 21%, copper up 28%, platinum up 78%, coffee up 28%, cobalt up 100%. Tin up 29%. Palladium up 60%. Rhodium up 73%. Neodymium up 41%.”

If Western (and Chinese) banks expand in a big way, they could go even higher. ASX resource investors take note.