Here’s a big domestic economy bull turning bearish and going for miners. Tim Baker from Deutsche:
Challenges remain: global data surprises have turned negative, and policy uncertainty is high. But valuations appear less worrying. The PE is now a little cheap vs fair value, and at spot commodity prices the PE is 10% cheap – about right given where policy uncertainty sits. Further, earnings momentum looks decent. Our year-end target implies some upside, but we see near-term direction flat-to-down due to challenges at the micro level. Conviction is very low – the number of ‘buy’ ratings is around record lows, and subdued volatility suggests investors feel likewise. Stock correlations continue to drop, favouring stock-picking.
Mining goes from underweight to overweight. (1) Hard to ignore coming earnings upgrades (driven by commodity prices and cost-out) that should take PE ratios fairly low. (2) Still climbing off the bottom – historic underperformance, very low analyst sentiment, light investor positioning. (3) China’s data is okay – the five-year slowdown seems done. (4) EM equities are being boosted by inflows, and resources tend to follow EM.
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