Goldman Sachs says the time is now to push the chips toward the mining stocks, specifically BHP, and sell the banks, particularly Westpac.
Mining stocks are trading at 11.9 times earnings compared with banks that are trading at 13 times, according to Goldman Sachs strategist Matthew Ross.
Using “10-year average earnings as an anchor for valuations,” says Ross, Australian banks are “40 per cent more expensive than miners”.
Goldman Sachs has a sell rating on Westpac because it has a “larger exposure” to a structural decline in mortgage credit growth. It has a buy rating on BHP Billiton because of its “diverse asset base” and “low cost operations”.
At 1248 AEST Westpac shares had fallen 54.9 cents, or 1.7 per cent, to $28.98. BHP shares had risen 42 cents, or 1.2 per cent, to $34.40.
The benchmark S&P/ASX200 Index fell 2.152 points, or 0.04 per cent, to 4968.50.
Goldman Sachs expects the world economy to grow 4 per cent and the Chinese economy to grow 8 per cent in 2014. But the Australian economy runs the risk of a “domestic recession” in the first half of 2014, says Ross.
The “rising risk of a domestic recession in the first half of 2014 suggest that Australian banks will underperform,” he says. Ross expects “weak nominal economic growth” to continue until 2016.
Goldman Sachs forecasts higher global bond yields. That will “weigh on bank valuation and improve sentiment in the miners”, says Ross.
And a weakening Australian dollar will help resource company earnings, he says.
The Australian dollar has fallen 7.7 per cent against the US currency this month. It was trading at $US0.9571 at 1255 AEST compared with $US0.9616 yesterday, according to Bloomberg data.
The cost base of mining companies is in Australian dollars. Commodity prices are generally fixed in US dollars and may stabilise, further underpinning resource mining company profits, according to Ross.