Markets

Analyst Actions: Credit Suisse Downgrades Mining to Underweight

Credit Suisse said: "Our stance on mining had been tactically neutral, but strategically underweight. We now take tactical weightings down to underweight as well. This downgrade pays for the further upgrade we made to the corporate spend-related sectors (advertising, hotels, software) in mid-February. We remain benchmark European cyclicals (overweight those in the US). Our concerns on mining are:

Increased caution on China. "Investment growth and PMI new orders have dipped. Growth has become even more unbalanced (investment share of GDP of 48%) and reliant on borrowing (private sector leverage is 176% of GDP). The risk of policy tightening is growing, with inflationary indicators at two-year highs (and authorities seeking to control housing)."

Global recovery pause. "Normal cycles in ISM new orders have a mid-cycle correction after 8 months - the current upswing has lasted 7 months. Mining has historically been one of the most sensitive sectors to global PMIs.

Not the beta play it once was. Mining has not been able to outperform despite rising markets and improving economic momentum, as cost inflation and capex have eroded profitability. Thus we doubt mining can rally if PMIs stabilise. Credit Suisse expects iron ore prices to fall to $110/tonne by end-2013 (80% of the time iron ore prices fall, mining underperforms)."

Supply side response. "Mining is the worst-ranking sector on our capital discipline monitor. Despite recent capex cuts, FCF yields are one of the lowest of any sector. The capex ramp-up of the last few years will lead to iron ore and copper supply growth outstripping demand growth, putting pressure on real commodity prices that are above long-run averages.

"Valuations are not that cheap (P/E relatives are 1 stdev above average) and 2013E FCF yields are just 3% for Rio and BHP.

"We are most cautious on the process industries (steel and aluminium) and remain underweight the mining capex plays (Sandvik) and domestic Australia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2016 MTNewswires.com. All rights reserved. Unauthorized reproduction is strictly prohibited.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Commodities

Latest Markets Videos

MTNewswires

Founded in 1999, MT Newswires (formerly known as Midnight Trader) is a leading provider of original source, multi-asset class, real-time, global financial news and information to most of the largest banks, brokerage firms and professional market data, trading & research applications in North America.

Learn More