This is ‘as good as it gets’ for miners

Macquarie analysts are ringing the bell: this is as good as it gets for the ASX-listed miners.

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Not that they are negative on the sector, it’s just that it’s “becoming incrementally harder to identify” catalysts for further gains, strategists from the bank’s wealth management division write.

“For the near term, it feels more like greed than good sense to maintain such an aggressive overweight, but we are not in the fear stage,” they write.

The term “overweight” refers to a portfolio’s exposure relative to the benchmark weighting of a sector or stock, usually with the ASX 200 index as the reference.

Most equity strategists would agree it’s time to take some money off the table after last year’s incredible run: the All Ords Metals & Mining index has climbed 40 per cent over the past 12 months.

But the Macquarie team is the first to move to a “neutral” view.

Two weeks ago Morgan Stanley recommended that clients “trim” overweight positions to resources, which they put down to “risk management and profit taking”. Likewise, and around the same time, JP Morgan strategists said they were “narrowing” their exposure, but that it “remained their largest active overweight position”.

A few days after that Deutsche Bank’s equity strategy team put out a note to clients saying they remained bullish on the sector. Shrugging off fears of commodity price falls, they said “stocks have already priced in a fall, and that share prices look low relative to firm Chinese growth”.

Investors spent a lot of the second half of 2016 trying to get ahead of the hard-running sector, and the “easy option” now would be to stay overweight this year and wait for a definitive sign that conditions have turned against the trade, the Macquarie analysts write. ‘Tactical correction’

“A number of factors would indicate we are premature in taking risk off the table,” they write. They point to supportive factors such as an improving global growth backdrop, a lack of evidence that China is slowing meaningfully, and continued supply side constraints, as well as mining “earnings expectations which have further mark-to-market upside”.

But they believe the miners will be hard hit during any “tactical correction” in the market, an assertion backed up in Wednesday’s session, during which the sector led the losses on the ASX’s worst day since the US election.

“In addition,” they write, “we are 11 consecutive months into the upgrade cycle (long by historic standards) with expectations upgraded by $12 billion over this time – the equivalent to 25 per cent of the total market earnings basket in upgrades alone.

“We are now seeing the size of earnings revisions decline and the delta [change in the rate of growth] become more incremental.”

Macquarie’s quantitative analysts “recently highlighted the difficulty in forecasting commodity prices”. That insight has also helped inform the strategists’ view that “rather than assume they [commodity prices] are about to roll over, we concentrate on the lack of catalysts that translate into a more commodity-friendly backdrop.”

As they move to neutral on the sector overall, the Macquarie strategists want to focus their money on stocks “where higher earnings are translating into higher shareholder returns and where we are less exposed to single commodity risk”.

That means reducing exposure to Rio Tinto and Fortescue, and concentrating their positions in BHP and South32.

Finally, their “trigger to move to underweight would be further Chinese liquidity tightening (already underway), signs of additional Chinese steel order-book weakness and/or further iron ore inventory build”.