It certainly has been a great year for the shareholders of mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
Thanks largely to rising commodity prices the shares of these two miners have risen by a solid 30% and 17% respectively year to date.
But is it time to lock in these gains and focus on other areas of the market? According to analysts at Citi it is.
A research note out of the global investment bank this morning reveals that its analysts have downgraded both BHP Billiton and Rio Tinto to sell ratings.
The reason for the downgrade is down to Citi's bearish view on commodity prices in the next 12 months. They expect a significant pull back in bulk commodities at the end of the year and through to 2017 on the back of increased supply and slowing demand.
Late last month the Fairfax press reported that Citi was forecasting iron ore prices to fall to US$45 a tonne in 2017 and US$38 a tonne in 2018. Whilst a lot can change between now and then, at this point in time I would have to agree with this view.
The expected increase in supply from both Australia and Brazil is likely to put significant pressure on prices, especially if the strong demand from China is not sustained. If prices do drop then I expect profits will be squeezed and the share price may drop noticeably lower.
Unfortunately I'm also quite bearish on oil prices. Although oil prices have had a good run recently, the proposed agreement by OPEC to cut production is far from a certainty. There are a lot of doubts floating around the market at the moment and I wouldn't be at all surprised to see the agreement fall through.
Even if it did go ahead, increased production from the United States could potentially counter any cuts that OPEC makes and hold prices down.
So right now I would suggest investors follow the advice of analysts at Citi and lock in those gains today. In my opinion there are a number of areas of the market with strong growth prospects that investors would be better focusing on.
