Banking and mining are two of the most influential industries on the Australian stock market, as represented by the S&P/ASX 200 Index (ASX: XJO). In 2024, both sectors have had vastly different performances, leaving investors wondering—where should you invest? Let's dive into the performance of these two sectors and what you need to consider when making your decision.
Why Is the Mining Sector Struggling in 2024?
The mining sector, particularly iron ore producers, has faced a challenging year. Major players like BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Metals Group Ltd (ASX: FMG) have seen significant drops in their share prices—BHP is down 22%, Rio Tinto has declined by 19%, and Fortescue has taken the hardest hit with a 41% drop.
A key driver behind this downturn is the falling price of iron ore, which is largely due to weak demand from China. With China being one of the largest consumers of steel, its declining industrial output and property sector issues have lowered demand for iron ore. On top of that, increased supply from Vale, a major Brazilian producer, is adding further pressure to prices.
Why Are ASX Bank Shares Performing So Well?
In contrast, the banking sector in Australia has had a strong 2024. Commonwealth Bank of Australia (ASX: CBA) has risen by 26%, while Westpac Banking Corp. (ASX: WBC) surged by 42%. Other major banks, including ANZ Group Holdings Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB), also saw significant gains, with 20% and 26% increases, respectively.
Banks have benefited from stable interest margins and lower-than-expected levels of bad debt. Despite the high inflationary environment, consumers and businesses have handled the pressure better than anticipated. Moreover, CBA’s digital innovation efforts, such as its AI Factory in partnership with Amazon Web Services (AWS), aim to cut costs and improve customer service, positioning it for future growth.
What Should Investors Consider When Comparing Banks and Mining?
The banking and mining sectors are offering starkly different returns in 2024. While Fortescue saw a 41% decline in its share price, Westpac surged over 40%, highlighting the divergent fortunes of the two industries.
For investors, the decision between the two comes down to risk tolerance and market outlook. The mining sector is highly dependent on global demand, particularly from China, making it vulnerable to shifts in commodity prices. If China's economic challenges persist, mining shares may see further declines.
On the other hand, the banking sector offers more stability with steady earnings, strong dividends, and growth opportunities through technological advancements like CBA’s AI initiative. This sector may appeal to investors seeking growth with lower risk.
Is It Too Late to Invest in ASX Bank Shares?
For those who have missed the banking sector's impressive run in 2024, a key question is: is it too late to invest? Some analysts suggest that certain bank stocks, like NAB, may be overvalued. Morgan Stanley has issued a price target indicating a potential 11% downside for NAB.
However, dividend yields from Australian banks remain attractive. For example, ANZ’s 5.7% dividend yield continues to outpace many other major banks, making it appealing for income-focused investors. While some banks may be overvalued, others still offer opportunities, particularly for those seeking dividend income.
Which Sector Is Right for Your Investment Goals?
In 2024, the choice between ASX bank shares and ASX mining shares comes down to your investment strategy. Mining shares have faced significant headwinds due to falling iron ore prices and weaker demand from China, while banks have thrived on stable earnings, dividends, and technological innovation.
For investors seeking long-term stability and income, ASX bank shares may be the more appealing option. However, if you have a higher risk tolerance and believe in a commodity price rebound, there may be opportunities to invest in mining shares.
