The outperforming mining sector may have more room to run higher after Credit Suisse recently upgraded its recommendation on the sector to "overweight", according to a report in the Australian Financial Review.
It seems like a bit of a late call given that ASX mining stocks have been running hard over the past two years with the S&P/ASX 200 Materials (Index:^AXMJ) (ASX:XMJ) index surging over 30% compared to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) at less than 5%.
But the broker thinks the sector will continue to outperform on the back of a few big global tailwinds. That's great news for the BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price – all of which are at or near a 52-week high!
Miners riding high on global trends
One reason why Credit Suisse's head of global equities, Andrew Garthwaite, thinks miners will push higher is because he thinks the slump in global industrial production in the December quarter is bottoming out.
What's giving him hope is a small rise in the "new orders" component of the global Purchasing Managers Index (PMI) and in the Chinese PMI index. He commented that mining stocks typically outperform in the one- to three-month period after the Chinese PMI index has increased.
What would give the sector another boost is if global industrial production also rises given its link to commodity prices.
Invested yield curve is good for miners
The surprising comment from Garthwaite is the inverted yield curve. He pointed out that mining has outperformed in 80% of the times when the bond yield curve is inverted.
The curve inverts when the yield on longer-dated US government bonds (typically the 10-year) falls below the short-term bonds (bonds with three- or six-month maturity).
This happened recently and nearly every time the yield curve inverts, the US economy has fallen into a recession 15 months later.
Experts are debating if the US is headed for a recession this time as well and there doesn't seem to be a clear answer.
Regardless, mining stocks could be in a sweet spot in either scenario. If economic growth persists, commodity prices will hold up well and that bodes well for profits among the miners.
If the global economy contracts with the US, the strong balance sheets of the big miners will provide some shelter from the market storm as the group is flushed with cash from stubbornly high commodity prices and years of cost cutting.
Credit Suisse estimates that the mining sector is generating a free cash yield of around 11%, and even under stress testing, the yield still comes in at a respectable 4% to 5%.
