Commodities | Nov 17 2006
By Rudi Filapek-Vandyck
Copper’s fall from grace has caused its first casualties at GSJB Were with equity strategist Alastair Hunter reporting today BHP Billiton (BHP) and Oxiana Resources (OXR) have both been removed from the stockbroker’s so-called Conviction List.
Both stocks have been replaced with Foster’s (FGL) and Westpac (WBC), not only signaling the stockbroker advocates a move away from resources exposure but also a more defensive stance in the short term.
The reason for the removal of BHP Billiton and Oxiana is the persistent weakness of the spot copper price as official inventories continue to rise and doubts have crept into the market about demand from China and the US in the year ahead. In Europe copper demand has already weakened and this is cited by some market watchers as the main cause behind the metal’s price weakness recently.
The broker is quick to point out the concept of a Commodities Super Cycle is still very much alive, it’s just that one a 2-3 month’s horizon it would appear copper’s fortunes might be in for some rough and uncertain times and that is expected to have its impact on the performance of leveraged stocks, such as BHP Billiton and Oxiana.
For reasons unknown to us (as they are not provided in today’s report) another copper powerhouse Rio Tinto (RIO) has been kept on the list which in essence groups the broker’s best trading ideas (highest conviction).
In a separate strategy report GSJBW’s resources strategist Malcolm Southwood spares no effort to highlight and emphasise this is not to be interpreted as the end of the Commodities Boom is nigh. It’s just that general market confidence in the theme has taken a hit while inventories continue climbing and the price outlook for copper is, well, weak.
But China will start buying again, Southwood stresses. He believes Chinese destocking has been responsible for the red metal’s sudden reversal of fortune recently. As the process will come to an end, renewed buying will push the market back into deficit in the first half of 2007, he predicts.
All in all, GSJBW would remain very reluctant sellers at this point in time. Moreover, the broker would actually advise investors move a few more of their investment dollars towards resources stocks while they’re as cheap as they are (and likely to get even cheaper in the short term).
And oh yes, Foster’s has been picked because of the improving wine market dynamics while Westpac is regarded a value story: cheaper than the peers.
Merrill Lynch’s team of resources analysts suggested a similar scenario for resources stocks last week.