Goldman: Still underweight on resources stocks

The resource sector is seeing signs of recovery, with gains in oil and iron ore prices after a sustained rout in the last 20 months, but investment bank Goldman Sachs is still underweight on the segment's stocks, it said in a note on Wednesday.

Goldman has three main reasons that now isn't the time to take bets on resources stocks.

First, prices need to remain lower for longer to drive production cuts and remove oversupply, it said.

Secondly, Goldman expects the U.S. Federal Reserve will surprise the market with three interest rate hikes this year, reversing recent U.S. dollar weakness. A stronger greenback typically weighs on many major commodities, which are denominated in the U.S. dollar.

Additionally, resource stocks now trade at valuations about 20 percent above their long-run multiples, Goldman said.

But Goldman's outlook on the sector's stocks isn't entirely negative. It's turning "less cautious" on the earnings outlook for resource stocks than it had been "for some time."

"Policy makers appear more willing to act to stimulate the Chinese economy, particularly with fixed asset investment. And, at the stock level, the recent decisions to cut dividends by the big miners has removed the tail risk of the firms weakening their balance sheet position by funding unsustainably high dividends," Goldman said.

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