Why commodity producers will shine as the financial giants lose their lustre
Australian investors face a crucial choice between bank stability and mining profits but UBS believes one major sector is positioned to forge ahead.
Australian investors face a classic dilemma: do they stick with the banks which have delivered stellar returns or pivot to the miners riding a commodity price boom led by gold?
UBS equity strategist Richard Schellbach has crunched the numbers. Despite some contradictory signals, he believes that on the balance of evidence, resources companies will outperform banks from here on.
That may already be under way. The materials index is up 19 per cent on the year to date compared with 14 per cent for banks. It’s a sharp turnaround from 2024, when materials fell 17 per cent but banks rose 30 per cent.
Schellbach looks at four key factors to determine which sector should prevail. They are economic cyclicality, credit conditions, profitability and longer-term structural trends.
His conclusions are mixed on the first two measures but decisively favour miners on the latter pair.
“On balance our top-down guides prefer miners over banks,” Schellbach said in his report.
“The economic and credit cycles give mixed signals of whether miners or banks are better placed.
“But in terms of profitability and secular trends, miners come out on top.”
The cyclicality question is particularly murky. Banks typically shine in the early stages of economic cycles, while miners usually do best late in the cycle when economies are overheating.
Right now, Australia is showing characteristics of both.
Falling inflation, interest rate cuts and rising real wages suggest an early cycle environment. But sky-high share prices, elevated house values and surging commodity prices scream late cycle.
“Cases can be made that we are early in the economic cycle … but also that we are already late in the cycle,” Schellbach said.
Credit conditions tell a similar story. Easing financial conditions favour banks, but rock-bottom credit spreads and equity risk premiums point to late-cycle dynamics that benefit miners.
Where the picture becomes clearer is profitability. Miners currently offer superior returns on equity and dividend yields compared with banks. Normally, such strong metrics from resources companies would signal dangerous “peak cycle” over-earning. But not this time, according to Schellbach.
He argues commodity prices have become less volatile as miners better manage supply and demand.
Crucially, mining companies aren’t using excessive debt to juice returns, and their improved capital discipline means dividends are more sustainable.
Meanwhile, bank dividend yields have compressed as share prices raced ahead of earnings growth.
CBA shares doubled in value from late 2023 to mid-2025 before retreating about 15 per cent.
The sector’s sliding returns on equity reflect its mature nature.
The most compelling argument for miners involves secular trends, particularly the US dollar.
A weaker greenback typically supports commodity prices, which in turn drives mining stock outperformance.
“Loose fiscal policy and the pressure to cut rates in the US are a negative for the US dollar,” Schellbach said.
“This poor balance sheet story for the US sets the stage for the US dollar to trend lower over the coming years.”
The commodity surge is already evident. Gold has soared 57 per cent in the year to date. Copper is up 27 per cent and iron ore has gained 11 per cent.
Despite favouring miners overall, UBS added Westpac to its most preferred stock list.
With the Reserve Bank’s rate-cutting cycle nearly finished, pressure on net interest margins will ease. Improved consumer spending and housing activity should boost loan growth.
“Although we will remain underweight Aussie banks as a sector, we believe the improving earnings environment warrants selective exposure,” Schellbach said.
The volatility in bank shares has been evident already this week as ANZ surged as much as 5.8 per cent following its strategy day, only to reverse course after hitting a 10-year high. CBA is currently down 3 per cent this week and at one point hit a six-month low of $161.82.
“Although we will remain underweight Aussie Banks as a sector, we believe the improving earnings environment warrants selective exposure to the sector,” Schellbach said.
Westpac is UBS’s preferred exposure among the big four banks and apart from CBA, the valuations of Aussie bank stocks is in line with the rerating of the broader market over recent years.
But the weight of evidence favours resources companies as commodity prices benefit from a weakening US dollar and disciplined supply management.
UBS has added Newmont to its preferred stock list to gain more leverage to the rally in gold.
It has also added Westpac as waning rate cuts are expected to ease the pressure on net interest margins while home loan growth picks up.
Telstra is back on the list on the appeal of capital management, dividends and growth angles.
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