Macquarie believes the South32 Ltd (ASX: S32) share price could have some tough times ahead of it.
The broker said that some shares it previously recommended, such as South32, are now at risk of underperforming in the face of substantial interest rate hikes made in the United States, The Australian reports.
South32's recent share price performance doesn't help its case either. The ASX mining share has lost more than 2% of its value year to date.
By comparison, the S&P/ASX 200 Materials Index (ASX: XMJ), which the company is a part of, has gained more than 1% over the same period.
So let's take a look at why the broker has changed its position on South32.
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What did the broker say?
Amid Macquarie forecasting a recession in the United States next year, shares of the metals and mining company were dropped from the bank's model portfolio.
Model portfolios contain baskets of diversified shares that are recommended by brokers to clients. They are created to help clients reach their investment goals by generating an estimated rate of return from investing in them.
Macquarie Research commented on the change to its portfolios, per The Australian:
The portfolio changes we have made are done to reduce exposure to earnings risks, while still trying to minimise exposure to highly valued stocks. We also reduce exposure to stocks that benefit from higher bond yields and rotate to 'bond proxies'. Our changes are also informed by what worked in past recessions.
It should be noted that dropping South32 from its model portfolio does not constitute a sell recommendation.
However, judging by comments from Macquarie Research, it appears the bank believes the company could miss its earnings estimates or that its shares are otherwise overvalued by the market.
Macquarie is not the only broker that has expressed bearish sentiment about South32 in the recent past.
Last week Ord Minnet ASX broker Tony Paterno rated the company as a hold and said a slowdown in global growth, if it eventuates, could impact commodity prices. That could, in turn, affect South32's top and bottom lines.
Meanwhile, the company was downgraded by Goldman Sachs near the start of October. The bank also downgraded the share's price target to $3.70 each, leaving it with an estimated downside of almost 7% at the time of writing.
South32 share price snapshot
South32 shares are currently trading for $3.97 each, up 3% on the day. They are also up 11% over the past year.
Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is up 0.7% on Tuesday and down 2% over the past 12 months.
South32 has a market capitalisation of almost $18 billion.
