Macquarie Bank thinks the rally in commodity prices, and mining stocks, is now probably “as good as it gets”, reducing its exposure to the sector from overweight to neutral.
“We are pairing back our commodity sector overweight preferring not to chase the greedy gains at this point,” it says.
“It is not a clear-cut decision, but it is becoming harder to identify upside catalysts and the hurdle for surprise is becoming much greater with expectations already incorporating a lot of the positive momentum around growth expectations, particularly in China, as well as the continued support from supply side reform.”
In stock specific terms, it said that it is concentrating its positions in BHP Billiton and South 32, but reducing exposure to Rio Tinto and Fortescue Metals Group.
Macquarie says that the downgrade to neutral does not mean that it’s negative on the sector, insisting that the decision is more a case of hedging its bets.
“Total return prospects on a 12-month basis remain appealing against a market where returns will remain capped by valuation constraints, modest earnings upside and a potentially disruptive rise in the discount rate,” it says.
“However, there are signs emerging that point towards fatigue in the commodity trade with the sector having reached an extreme overbought level and commodities not being a big beneficiary of the pro-business stance coming out of the US.”
On China, the largest consumer of commodities globally, Macquarie says that while recent data doesn’t point to a roll over in the commodity trade, it suggests that there is little evidence that Chinese growth with strengthen from current levels.
Reflective of its neutral position, the bank says that “valuations are not a reason to sell the sector but neither are they a reason to buy it”.
It also says that a trigger to switch to an underweight rating on the miners would require further Chinese liquidity tightening, signs of additional Chinese Steel order book weakness and/or further iron ore inventory build.