Credit Suisse downgrades mining sector to 'underweight'

Credit Suisse downgraded the mining sector on Friday as it reviewed its global equity strategy.

The bank kept its ‘benchmark’ weighting on European cyclicals but cut miners to ‘underweight’ from ‘benchmark’.

It said the bounce in metals prices has the characteristics of a seasonal bounce rather than a fundamental turn higher.

In addition, the bank said it does not think oil can rise much above $45 per barrel, adding that speculators are extremely long oil.

CS said the big change in dollar sentiment has been seen. “We would characterise our current dollar view as mildly bearish, but would note that consensus expectations for the dollar already appear to have shifted significantly. Speculative positions on the dollar are now close to neutral after an extended period of substantial long positions.”

Credit Suisse pointed out free cash flow in the sector is still poor, while even adjusting for spot prices, the sector’s valuation is at a modem premium to its norm.

Nevertheless, there remain some bright spots for miners, with book-based valuations cheap, signs of production discipline and de-stocking in steel.

CS said investors might wonder why the bank has not chosen to be ‘underweight’ European cyclicals.

It argued that European cyclicals relative to defensives are close to being as cheap as they have been at any point since March 2009 and that their performance relative to defensive has been correlated very closely to the oil price .

“Cyclicals performance has also been correlated with Bund yields and we find that after an acceleration/extension of QE, bond yields tend to rise (although cyclicals have already priced in a rise in Bund yields).”

Finally, it said upcycles in European sector risk appetite usually last longer than the current one.

The bank highlighted a preference for European domestic plays because of its positive stance on the domestic demand recovery and its view that the euro is likely to be more stable than investors expect.

“We still believe in the structural growth story in European domestic demand,” it said.