Macquarie Wealth Management is recommending going overweight on resources, favouring that sector over industrials as a global wave of government infrastructure spending drives up demand for mining and energy resources.
One qualification: this scenario suggests a stronger Australian dollar — the quintessential commodities currency — which could be a headwind for company earnings derived offshore.
Macquarie’s (ASX: MQG) analysts between them have listed ASX-listed stocks as “outperform” in the event that commodity demand picks up.
The research firm’s report argues that the mini-upcycle began in April, a month after equities hit their low point.
In the most recent mini-upcycle the New York-based Commodities Research Bureau Raw Industrials (CRBRI), a broad index of commodity prices, rose 33% over 2.6 years, a rise similar in size to those experienced in mini-upcycles in the 1980s and 1990s.
“If we are right that an upcycle has started, we could see the CRBRI rise 20% to 50% over the next one-to-three years,” the report said.
Stock recommendations overweight resources
Then choices are broken down by analyst.
Hayden Barstow likes the three iron ore stocks listed above as well as Mineral Resources (ASX: MIN); in the copper space he goes for Oz Minerals (ASX: OZL) and Sandfire Resources (ASX: SFR) while for nickel his choices are Western Areas (ASX: WSA) and Nickel Mines (ASX: NIC).
However, Mr Barstow is more cautious when it comes to coal and alumina, singling out South32 (ASX: S32), New Hope Corporation (ASX: NHC) and Alumina (ASX: AWC) as stocks that may not ride the coming wave.
Energy man Mark Wiseman likes Oil Search adds Santos (ASX: STO) in the large cap category. Senex Energy (ASX: SXY) and Carnarvon Petroleum (ASX: CVN) are also on Mr Wiseman’s list of likely outperformers.
When it comes to mining contractors and services, John Purtell prefers Worley, Downer EDI (ASX: DOW) and ALS (ASX: ALQ); then for basic materials he nominates Incitec Pivot (ASX: IPL) because of rising phosphate prices and Orica (ASX: ORI) with its global commodities exposure — although thermal coal is a headwind for that company.
Mitchell Sonogan likes Seven Group Holdings (ASX: SVW) and Emeco Holdings (ASX: EHL), while Peter Steyn likes Bluescope Steel (ASX: BSL) in steel and continues to favour James Hardie Industries (ASX: JHX) among his construction materials names.
Two drivers behind higher commodity prices
Macquarie says that, in its view, the two drivers behind the mini-upcycle would be the recovery in global activity after the COVID-19 shutdowns and a shift to a more government-led economy for a time as public investment increases in response to weaker private demand.
“The reduction in interest rates around the world is also likely to drive demand in home building and autos, which are both relatively commodity intensive,” says Macquarie.
The report also noted that resource stocks could also benefit from rising valuations relative to industrials, in particular, the banks.
This could occur if commodity prices drive expectations of higher inflation and interest rates, developments that could reduce valuations for industrials.
“The suspension of dividends by some industrial companies may also support a re-rate of those resource stocks that keep paying dividends,” Macquarie added.