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sandp dumps power pick rio tinto

When S&P unveiled its ten European “power picks” at the start of the year, it forecast that Rio Tinto would benefit from rising iron ore prices, driven by continued high levels of Chinese demand.

“Iron ore is the key driver of our estimates, reflecting Rio’s low cost position within this market and our expectation for historically high prices in 2013,” the firm wrote in January. “2013 demand is supported by improving economic sentiment in China, low inventories and limited supply growth.”

However, fears that China could suffer a sharper-than-anticipated economic slowdown prompted falls in both emerging market equity and commodity prices during the first half of 2013.

Indeed, as Expert Investor Europe reported last month, Bank of America Merrill Lynch’s latest Global Fund Manager Survey found commodity allocations at their lowest levels since the poll began – prompting the firm to label China-linked assets “the biggest contrarian play in the market today”.

For Rio Tinto, the decline in appetite for mining stocks has contributed to a fall of about 25% in the company’s share price this year, according to data from the London Stock Exchange.

Negative view on miners

In an update from S&P Capital IQ Equity Research this week, head of EMEA equity research Roger Hirst wrote that Rio Tinto had been downgraded owing to a “negative assessment on mining stocks”.

Rio’s replacement in the list is global aerospace and defence group EADS, which S&P forecasts will continue to see “robust order flow”, especially from the emerging markets. S&P expects the firm to increase production rates of its Airbus A320 commercial aircraft by 12% year-on-year in 2013.

The remaining nine S&P European “power picks” from January are unchanged. They are: ASML, BNP Paribas, Carlsberg, Centrica, Essilor International, Julius Baer, Prudential, Sanofi and Telenor.

‘Attractive entry point’

Despite its downbeat view on the mining sector, S&P revealed a bullish outlook for European equities more broadly, in its mid-year report, published last month.

“We believe that European equities offer further opportunities ahead of an economic recovery in [the second half of 2013] and view this seasonal weakness as an attractive entry point,” wrote Robert Quinn, the firm’s chief European equity strategist.

“We have greater conviction in an earnings recovery, excess liquidity is still supportive to equity markets contrary to popular perceptions and we expect easy monetary conditions to facilitate an additional 10% multiple expansion for the remainder of this year.”

This positive assessment tallies with voting by fund selectors at Expert Investor Europe’s conferences in the first half of 2013. A net 37% of delegates planned to increase their exposure to European equities over the following 12 months – up from 29% in the equivalent period last year (see chart).

Platinum members can view full breakdowns of the voting data from all of Expert Investor Europe’s events this year, in The Data Centre. To see how sentiment on various topics has changed over time, use the Country Data Summaries links on the right-hand side.

tom@ybc.tv

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