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* Some funds, analysts stay positive on mining stocks
* Cheap valuations, higher yields attract investors
* Analysts see positive results of China policy measures
By Atul Prakash
LONDON, Oct 13 (Reuters) - Some brave investors are taking arisk by betting on a sharp rebound in European basic resourceshares, which have mounted a fledgling recovery recently afterslumping more than 40 percent in just five months.
Investment management and share dealing firmRedmayne-Bentley has been increasing its exposure to the miningsector, while wealth manager Crossbridge Capital continues tohold its investments in Glencore, Rio Tinto andAlcoa. HSBC maintains an "overweight" rating on thesector.
Cheap valuations, attractive dividend yields and hopes thatpolicy action from China, the world's top metals consumer, wouldprevent its economy from derailing have been prompting investorsto take advantage of weak share prices.
Shares in miner and trader Glencore crashed about 80 percentin five months to a record low in late September, while globaldiversified miners BHP Billiton and Rio Tinto fell more than 30percent during the period, before partially recovering.
"We have got a contrarian view on the materials sector,which is deeply out of favour at the moment," Robert Parkes,director of global equity strategy at HSBC Bank, said.
"The sector is very sensitive to the global demand outlook,which we don't believe is falling off a cliff, and we expectfurther policy stimulus in China to deliver an upside surpriseto growth in the coming quarters."
Morgan Stanley upgraded the mining sector to "overweight"from "underweight", saying macro momentum in China could startto improve in coming months in response to a faster pace of newpolicy initiatives.
CHEAP VALUATIONS, STRONG YIELDS
Analysts said the timing was perfect for investors who hadmore appetite for risk and a relatively longer investmenthorizon as valuations were pretty attractive. Rock-bottom profitmargins could also suggest more mine closures, boosting metalsprices.
According to Thomson Reuters Datastream, profit margins ofEuropean miners have been hovering near record lows, havingfallen to about 11 percent from 17 percent at the start of theyear and from a high of 45 percent in 2011.
"I recently increased my exposure to the mining sector andintend to buy more. I don't see much downside in commodityprices as production cuts will give a fresh boost to metalsprices. Valuations are also quite attractive," David Battersby,investment manager at Redmayne-Bentley, said.
The 12-month forward price-to-earnings ratio for the STOXXEurope 600 Basic Resources index is now 12.5, down from16 in mid-May, due to a sharp fall in share prices and theirpoor earnings outlook. In contrast, the telecommunications andtechnology sectors trade at 18 times and 16 times respectively.
The dividend yields of BHP Billiton and Rio Tinto stood at ahigh level of nearly 7 percent.
"Their earnings are under pressure because of a sharp fallin commodity prices, but what they are giving you in return is agood diversified exposure at a very cheap price," Edmund Shing,global head of equity derivative strategy at BNP Paribas, said."Their dividend yields are also pretty high." (Reporting by Atul Prakash; Editing by Veronica Brown and DaleHudson)
