Sell mining shares and invest in energy stocks instead — that’s the message from the Swiss investment bank UBS. On the one hand, the bank believes that “unsynchronized” global growth and recessionary concerns in the U.S. make it difficult for mining companies to perform well. On the other hand, UBS expects energy stocks to continue delivering bumper cash flow this year, according to UBS. “Both sectors tend to benefit from rising global growth, but we don’t expect that. That is why we think this is an appealing relative opportunity,” UBS strategists led by Gerry Fowler wrote in a note to clients on April 3. “Energy free cashflow is very high and we think sustainable. Mining free cashflow is set to deteriorate significantly, in our view.” The performance of both sectors has been weak so far this year, with the Stoxx Europe Basic Resources index down by 6.7% and the Stoxx Europe Energy index up by just 1.8%. However, UBS thinks investors have an opportunity to target the relative value between those two sectors as their paths diverge during this period of global growth. The following table shows eight buy-rated energy stocks with double-digit price targets. The table below shows six sell-rated mining stocks with significant downside to their price targets. UBS analysts have forecast that free cash flow from the mining sector will decline as bulk commodity prices retrace from their highs. Copper prices are still hovering around their highs for this decade at about $4 a pound. If commodity prices move lower toward their forecasts, UBS estimates that free cash flow from the sector will fall to little more than 5%. On the flip side, UBS said it believes that even if Brent crude oil trades at $85 per barrel in 2024, current market levels would still provide a free cash flow yield of around 15% for energy stocks. That’s likely to happen for two reasons. First, valuations on energy companies are currently priced at a discount rate compared with pre-Covid levels, according to UBS, making them cheaper than before. Second, the bank’s analysts said the U.S. economy is predicted not to grow significantly, causing demand to exceed supply again within the coming months and leading to potentially sharp falls in commodity prices.
