GLOBAL broking giant Citigroup is advising its clients to move to a neutral position on Australian resource stocks, the first time it has gone soft on the sector since the bull run began in March 2003.
Isolating itself among the broking fraternity, Citigroup argues that the second quarter for 2006 will be weak for the sector as commodity prices stagnate and many resource stocks remain overvalued.
While it retains a few heavyweight stocks in its portfolio, including BHP Billiton, Citigroup believes many miners are overvalued by as much as 9 per cent after the strong run of the past three years.
Heavy demand for raw materials by China and India has primed the Australian share market in the bull run and created billions of dollars in returns for shareholders.
Rio Tinto has surged 47.7 per cent in value over the past 12 months, while Newcrest has gained 19 per cent, BHP Billiton 25.2 per cent, Iluka 21.7 per cent and Jubilee Mines 18.7 per cent.
That compares with the share market's 22 per cent return last year, pumped mostly by the resources sector.
Citigroup equity strategist Adrian Blundell-Wignell said the sector had become "stretched" but he remained confident the fundamentals were in place to ensure the commodities super cycle remained in play. "In our view as we come up to the second quarter, the resource sector will have a temporary set-back to a sideways kind of movement on the market," Mr Blundell-Wignell said.
"You won't be seeing earnings growth of 80 per cent (in the resources sector) this year.
"If earnings are going to slow, it is going to be because commodity prices are also going to lose momentum and their rise won't be as much as last year."
Citigroup expects earnings growth of around 17 per cent over the next 12 months.
A survey of other broking houses and fund managers shows the investment world is still bullish on the resources sector.
Colonial First State head of investment markets research Hans Kunnen said that while there was short-term risk in the sector because of volatile base metal prices, its imputation fund, the biggest in Australia, was still overweight on major diversified miners.
UBS was also overweight on banking and resource stocks, as was BT Financial and CommSec.
Citigroup also believes exposure to heavyweight banking stocks should be neutral.
While it believes the All Ordinaries index should move past the 5000 barrier soon, any sudden move to 5200 would put the market in a bubble.
Citigroup will take this message that the Australian share market is expensive territory to its annual investor conference in London, which begins today.
The conference is to include presentations from a who's who of Australian corporate heavyweights -- including Ralph Norris, Leigh Clifford, Don McGauchie and Roger Corbett -- and is designed to increase exposure to the Australian equities market for European investors.