MARKETS SPECTATOR: Miners rally against the clock

UBS strategist David Cassidy says the next four months may not be a great time for mining shares.

Cassidy believes iron ore prices may, in the third quarter – a time of seasonally low demand in China – “revisit $80 (a ton) and briefly go below that”.

He told a group of reporters at UBS’s Sydney offices today that miners and iron ore producers are running out of time to rally.

Chinese steel production in the future may annually increase by 3 per cent to 4 per cent compared with past years of as much as 15 per cent.

“Over the long-term China’s commodity intensity is lessening,” Cassidy says.

But he says BHP Billiton and Rio Tinto shares seem oversold.

There may be a silver lining for investors if Cassidy’s forecast decline in iron ore prices eventuates. If the iron ore price remains at about $80 a ton into December, Australia’s terms of trade will suffer, prompting the Reserve Bank to cut the cash rate to as low as 2.5 per cent, he says.

Cassidy believes gold stocks are oversold compared to the physical metal. Copper shares are also underperforming the physical metal adding some smaller gold miners have single digit PE valuations.

But miners have to get their house in order. The sector is a couple of years behind the industrials in being efficient.

Cassidy sees more upside in housing stocks such as Boral, Adelaide Brighton and Fletcher Building, while retail stocks such as Myer and Harvey Norman are pretty close to fair value.

He sees Australian banks, offering yields on average of 6 per cent, as more than double their price to book versus global peers.

Still, “the big search for yield” is continuing globally while the US Federal Reserve sticks to its quantitative easing policy.

On the broad market, Cassidy is not concerned about the valuation of 14 times forecast earnings. The market’s 20-year average valuation has been 14.5 times, he says.

The ASX is cheap to bond yields and dividend yields remain attractive.