Macquarie has upgraded its recommendation for BHP Billiton to overweight while at the same time exiting its positions in mining services firms Monadelphous and WorleyParsons.
In its latest equity strategy report, Macquarie has noted that the outlook for commodity prices appears to be improving following recent evidence pointing to the stabilisation in Chinese growth, the end to the destocking cycle and the potential for significant cost cutting by the major miners.
However, on the other side of this view is a deteriorating outlook for the mining services sector as miners turn their attention to aggressive cost cutting.
"We continue to see a long and grinding cycle ahead [LGC], so our 'LGC' framework remains firmly at the heart of our portfolio construction. It is important however to recognise that the 'LGC' does not completely negate the cycle. This 'sub trend growth' cycle continues to favour stocks with above average growth and highly secure 'income'”, the broker said.
Macquarie added that for the big miners, the realisation of this "long grind” is a big shift in focus towards cost cutting.
"We believe the major resource stocks are quickly shifting focus to cost reductions, just as their share prices have fully priced in a lower, 'normal' commodity price outlook.”
Source – Iress
The above chart of BHP displays a positive technical outlook. This week has seen the stock break up through the $35 resistance level, continuing the medium-term trend higher. It looks like there is a little bit of profit taking creeping in right now but that is likely to be met by ‘buying on the dip’ sooner rather than later.