Australian resources companies may be vulnerable to a correction after their share prices have become substantially overvalued since the market rally began in May, according to Aviva Investors.
Many of the pure play raw material stocks - those exposed to only one commodity - are in some cases more than 20 per cent overvalued, the fund manager's deputy head of equities Nick Pashias said.
"Everyone wants to be putting incremental capital into resources, but in our view that sector's run has largely played out in the short to medium term," he said.
"Over the long term it all depends on commodity prices, but right now a lot of the valuations in the resource sector are not compelling. The time to buy those companies was back in May - they have simply risen too fast and are priced for an extremely good economic outlook.
"We have sold down a lot of our holdings in these companies over the last few weeks."
The $110 million Aviva Investors Elite Opportunities Fund, which Pashias helps manage, has started taking positions in the underperforming steel sector and also within companies heavily exposed to the United States.
"We see long-term value in these companies. We don't know when steel prices will turn around but we think it will happen as capacity utilization around the world increases and as the US and Europe recovers," he said.
"We are also buying into US-exposed companies such as Amcor, Westfield and Billabong as they are 20 per cent undervalued in our view.
"We think the US is recovering - it's not off to the races but there have been signs over recent weeks that it is happening. The very strong Aussie dollar and very weak US dollar makes buying these companies here in our market even more attractive and compelling."
