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Go overweight on this sector ahead of the reporting season

If you are feeling anxious about the record high share market ahead of next month’s reporting season, you won’t be alone.

Stocks are priced for near perfection after the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index surged 21% over the past year and broke above the 7,000 mark for the first time in history.

Some experts believe that February’s profit results won’t live up to the hype and the coming weeks will bring halcyon days for short-sellers.

Short-sellers standing ready

Many short-sellers (those who borrow shares to sell on market in the hope of buying it back at a lower price later) have been under the pump as equities raced higher. This February could be the revenge of the short-selling nerds!

That would be bad news for the rest of us betting that there are further gains in the market. But there’s one sector that may provide a safe haven as I believe it’s well placed to make further gains in 2020.

Why mining can outperform

This is mining and it’s looking like one of the most resilient parts of the ASX in terms of issuing disappointing news.

I think this is the part of the market cycle where investors will need to pay more attention to risks of negative surprises than earnings growth.

Don’t get me wrong, beating profit expectations are great, but the thing that will really kill performance in your portfolio is stepping on a landmine.

Avoiding the disappointers

The fact is, we are unlikely to see many companies generate better than expected profit in this environment. There’s a much greater chance that companies will issue bad news this February.

From that perspective, our big miners look better placed to live up to expectations. Rio Tinto Limited’s (ASX: RIO) quarterly update illustrates this point. Our largest iron ore miner produced fewer tonnes than expected but investors are quick to forgive as the high price for the commodity more than offset the negative news.

There are no hidden surprises when it comes to commodity prices too as these are readily available. There may be some hiccups when it comes to mine operations, but I believe the market will overlook most of such issues in this climate.

Mining tailwinds

What’s more, global growth expectations in 2020 are positive for commodity prices. While the modest economic expansion forecast for this year isn’t enough to suggest stellar corporate profit growth, it should at least keep metal prices well supported.

It isn’t only lofty commodity prices that is going in favour for the sector. The strong balance sheets of Rio Tinto, BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) puts a safety net under the stocks.

It also leaves open the possibility of further capital returns when miners report their latest results next month.

There aren’t many other sectors with this number of things going their way.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

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.

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