Commodities | Feb 05 2007
By Greg Peel
It was in June last year that Merrill Lynch’s equity strategists moved to a “tactical” Neutral weighting on the resources sector, and on riskier assets in particular. The rating then became Underweight in September, with property trusts, insurers and banks being preferred. October saw both financials and miners return to Neutral.
Since October, financials have continued to surprise on the upside and miners have faltered. Undeterred, the equity strategists said today “Our cyclical indicators are now suggesting that positions in Australian mining stocks should be rebuilt…Both our inventory pulse and inventory spread indicators are now providing solid readings”.
They note that “Our move to neutral on the miners has not paid yet, despite stronger growth signals”. The strategists have now moved to “Moderate Overweight”.
In the meantime, Merrill Lynch’s resource analysts pulled both BHP Billiton (BHP) and Rio Tinto (RIO) – the world’s two largest diversified miners – back from Buy to Neutral in December. Vicki Binns and team decided we were in for some short term metals weakness, and we got it. Merrills joined only Macquarie in such a move, with every other broker in the FNArena database retaining Buy. The team have not joined in upgrading BHP and Rio today, although it might yet be early days.
It is important to note that, within any stockbroker, the equity strategy team may occasionally differ in view to the specific sector analysis team. It comes down to a matter of macro/micro, horizons, and possibly top-down versus bottom-up valuations.
Metals prices remain the great unknown in the equation. While consensus appears to be building that 2007 will see a continuation of strong prices, ahead of a supply catch-up beyond, events like the overnight loss announcement by a metals trading hedge fund – which caused zinc to fall 10% and copper 6% – don’t help.
Although they may help in making those resources stocks which appear cheap now even cheaper.
Merrills’ equity strategists would have moved to a “much more aggressive” overweight stance had metals prices actually fallen further, as their earlier analysis suggested. Is fund buying supporting commodities artificially? Well, last night would tend to suggest possibly so.
While Merrills’ strategists wrestle with these thoughts, investment advisor Aspect Huntley has moved to downgrade Rio Tinto (RIO). Despite a strong result last week, in line with expectations, recent share price strength means the analysts’ annual return forecast has fallen below 10%. This triggers a move from Accumulate to Hold. The B/H/S ratio in the FNArena database now falls to 7/3/0.
This move is in contrast to Deutsche Bank, which today retained a Buy rating after closer inspection of the result numbers. “The valuation remains attractive and near term growth is above average”, the analysts decided.
If it isn’t a bad enough day for zinc miners, Smith Barne Citigroup notes that as a group they have failed to capitalise on the shortness of zinc supply in negotiating prices with smelters. While BHP has been able to lean on copper smelters with all its weight, largely wiping out previous treatment charge premiums, Canada’s Teck Cominco has only managed a minor improvement in charges as a benchmark for the zinc industry.