The outlook for commodities is looking up for 2020 but this didn’t stop JP Morgan from downgrading three prominent ASX mining stocks.
The prospects for global growth markedly improved as a potential trade war truce between the US and China gets underfoot. Growth in the Eurozone is also looking up while central bankers look willing to supply liquidity to support economic expansion.
These factors are conducive for bulk and base metals but too much good news may be priced into some ASX miners.
“JPM’s Economics team expects global growth to accelerate through 2020, particularly from Asia. This bodes well for commodity demand and a continuation of positive price momentum,” said JP Morgan.
“However, several stocks are starting to look fully valued.”
Good news priced in
One stock that got the chop is Fortescue Metals Group Limited (ASX: FMG). The Fortescue share price fell 1.3% on Wednesday after the broker downgraded the stock to “neutral” following Fortescue’s 150% surge in 2019.
The stock is one of the best performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index last year.
“As iron ore approaches $100/t again, we believe investors will be reluctant to chase the stock due to fears the market has overheated,” explained the broker.
“FMG still offers a strong dividend yield, but has approached our fair value estimate.”
But the iron ore miner doesn’t look as overstretched as some of its mining counterparts, according to JP Morgan.
This is why the broker cut its recommendation on the Independence Group NL (ASX: IGO) share price to “underweight”.
“We know it is well held as a fully priced option on exploration but for us it is now just too expensive,” said JP Morgan.
“It is trading at a 20% premium to our valuation despite the 20% fall in nickel prices over the Dec Q.”
The Independence Group share price slipped 1.8% to $6.66 on Wednesday.
Losing its mojo
Another stock that got downgraded to “underweight” is lithium miner Orocobre Limited (ASX: ORE). The stock plunged 5.6% to $3.58 today and it has more room to fall as JP Morgan’s price target on the stock is $2.55 a share.
“The stock is up 30% this year and 40% since the start of Dec. We are having trouble reconciling this with other market signals,” said the broker.
“ORE itself downgraded its realised lithium carbonate pricing for the December Q twice.”
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.