UK miners looking overbought, telecoms very oversold - Morgan Stanley

The mining sector is starting to look overbought, according to Morgan Stanley, following a bumper quarter.

Morgan Stanley’s UK Sector Chartbook, published on Thursday, found that UK mining was the best-performing sector over the last three months.

But the bank, which retains an ‘overweight’ recommendation on the sector, added: “As a result, the sector is now the second most overbought in the UK market, with relative performance currently sitting 1.9 [standard deviation] above the 12-month average, having moving close to 5SD since September.

“A recent pick-up in base metal prices and an improvement in China sentiment have book helped the sector’s recent strong run. However, mining’s relative performance does look somewhat extended versus some underlying metal prices.”

Other sectors analysed by the bank included pharmaceuticals, telecoms and capital goods.

Morgan Stanley said UK pharma had “lagged the market marginally in the last couple of months”, having performed strongly for much of 2018.

It concluded: “Recent sterling strength can be viewed as a headwind for the sector, which continues to look expensive across a range of metrics.” Capital goods valuations were also close to historical highs, the bank noted, making it now the second-most expensive sector, relative to ten-year averages, after pharmaceuticals.

Morgan Stanley called telecoms “very cheap and very oversold”, noting it was “the worst performing sector in the year to date, falling almost 10%. As a result, telecoms are once again the most oversold sector in the UK.

“The sector still looks very cheap relative to its long-run history with average relative valuations close to historical lows. The sector also looks cheap in absolute terms, with the sector currently yielding over 8%. That is an all-time high in absolute terms and close to double the yield on the UK market.”