Analyst pick: Avoid Rio Tinto and BHP Billiton – buy CSL Limited and Harvey Norman

Speaking to Fairfax Media, UBS Group’s head of Australian equity strategy, David Cassidy, believes investors should consider limiting their exposure to mining stocks.

He said investors should focus on companies leveraged to a stronger economy and those with overseas earnings.

“China is still likely to slow into 2016 while at the same time we are likely to see supply increases, particularly for iron ore. Slowing demand and increasing supply gives us a bearish setup”, Mr Cassidy told Fairfax. However, he added, “The market is too bearish on the economy.”

Mr Cassidy, who correctly forecast a bad year for iron ore producers, believes investors should turn their focus from mining giants like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) towards shares of CSL Limited (ASX: CSL), Harvey Norman Holdings Limited (ASX: HVN) and Lend Lease Group (ASX: LLC).

Mr Cassidy’s strategy certainly appears to have merit. Recent employment data proved to be more positive than anticipated, a lower Australian dollar will boost local companies’ international competitiveness and accelerate foreign revenues, and house prices are moderating. Meanwhile, iron ore, oil, coal and an array of other commodity prices will likely continue to weigh on the share prices of mining and resources companies for the foreseeable future. And even if prices turnaround, there’s a chance it won’t happen for many years.

Foolish takeaway

The resources sector is coming under pressure as the supply of commodities to China surges in response to many years of unprecedented infrastructure growth. Unfortunately, when coupled with plateauing demand from China, more supply equals lower prices.

Such cycles in commodity prices are normal, but can take many years to play out. Therefore, I too believe it’s time to limit exposure to mining stocks, at least for the foreseeable future.

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Motley Fool writer/analyst Owen Raszkiewicz owns shares of CSL Limited. 

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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