"This rotation has further to run". Inside the 2 ASX stocks Alphinity is backing

Last week, I explored the materials sector inflection point with Matthew Fist from Firetrail in “No miners? ‘You’re missing out’, says Fist. Plus 2 ASX names to get you started.”

His argument was that the rally in commodities isn’t a speculative bounce, but a structural repricing with real earnings power behind it.

To recap, the materials sector has roared back in 2025, up more than 26% year to date and leading the ASX. Gold is surging, base metals are tightening and lithium is stabilising as geopolitics and supply constraints reprice risk. 

What looked like sentiment has evolved into a reset in leadership, with earnings flowing from defensives into miners, metals and energy-linked names.

This week, we’re taking that same theme into large caps and into the portfolios of Alphinity Investment Management, a manager whose track record is anchored in capturing earnings leadership and delivering alpha through disciplined, evidence-based stock selection.

Alphinity has made targeted adjustments, increasing exposure to iron ore and base metals, taking resources overweight and adding to mining services, funded by trims in insurers and exits in lower-conviction names. The team sees potential earnings upgrades if spot prices hold and is positioning for upside while managing risk.

With that backdrop, the full Q&A exploring Alphinity’s house views is below.

The materials sector is up over 26% YTD (as at 09/12/2025) – what’s driven this outperformance, and is it sustainable from here?

The Australian materials sector's strong performance during the second half of 2025 reflects a fundamental shift in earnings leadership driven by four key factors. 

First, analysts capitulated on overly pessimistic commodity price expectations after years of downgrades. 

Second, global demand proved more resilient than feared - China's export engine continues firing despite property weakness, while the tariff truce with the US provided relief. The US economy has also held up well, supported by AI-driven infrastructure investment. 

Third, supply has tightened due to production caps and unusually high mine disruptions.

Finally, the weaker USD (down 6.2% versus AUD year-to-date) has been supportive.

These dynamics have pushed most spot prices well above analyst expectations, triggering substantial earnings upgrades. 

Our recent research trip to China reinforced our view that these trends appear durable for the foreseeable future. This earnings leadership change should sustain as long as analyst expectations remain below spot prices.

Gold, silver and copper have surged this year, while iron ore has barely moved, and crude oil is down. Beyond the diversified miners, which subsectors within materials look most compelling right now and why?

Base metals, particularly copper and aluminium, look most compelling in our view. 

Copper faces tight supply from declining ore grades, lack of new discoveries, and recent disruptions, while demand strengthens from recovering economies post-central bank cuts, energy transition and AI infrastructure. 

Aluminium benefits from the same demand trends and is constrained on the supply side from Chinese production caps.

Lithium offers near-term upside as healthy Electric Vehicle demand and surprising battery energy storage growth (driven by lower costs and renewable firming needs around the world) push the market into deficit. Years of low prices have slowed supply growth, though a price surge will eventually incentivise new capacity.

Gold remains attractive despite its strong run, supported by central bank diversification away from USD amid geopolitical volatility and elevated US debt levels.

Lastly, Iron ore faces headwinds from flat to declining Chinese demand and rising supply, though prices may stay elevated longer than analysts expect as this dynamic unfolds only gradually.

Given the strength in key commodities, are investors simply riding short-term price momentum, or are you seeing genuine improvements in fundamentals across the materials complex?

We're seeing genuine fundamental improvements, not just momentum chasing. 

As long as spot prices remain above analyst expectations, producer earnings will continue being revised upward. Since share prices are driven by changes in earnings expectations—which tend to be serially correlated—these uptrends typically take months to fully play out.

The underlying driver is improving supply-demand fundamentals. Global demand has proven more resilient than expected, while supply continues to disappoint across multiple commodities. 

However, each commodity has distinct dynamics affecting tightness: lithium is experiencing upside demand surprises from battery storage adoption; copper faces ongoing supply disruptions and structural supply constraints; aluminium is benefiting from Chinese production caps.

The key is monitoring whether spot prices can sustain above expectations. Current conditions suggest these fundamental tailwinds remain intact for now, supporting continued earnings upgrades rather than mere price momentum.

What are the key risks for the sector from here, and how resilient are materials if growth slows?

The primary risk in our view is demand deterioration, whether from a weakening US consumer triggering recession, new tariff escalations, and/or geopolitical tensions disrupting trade flows. Materials are inherently cyclical and vulnerable to growth slowdowns.

However, supply-side factors provide for some commodities an elevated price cushion.

Ultimately, our positioning hinges on the gap between analyst expectations and spot prices. We'll maintain exposure as long as earnings revisions remain positive—meaning spot prices stay above expectations. 

If analyst expectations catch up to current pricing, or if supply-demand dynamics shift materially, we'll reduce exposure accordingly. 

The sector's resilience depends less on absolute growth levels and more on whether fundamentals can continue exceeding lowered expectations. 

Which stocks are you backing in the sector right now and why? Could you share two standout names in your portfolio?

We've built a significant overweight to materials over recent months, believing this earnings leadership rotation has further to run. 

Within the sector, we hold a modest overweight to iron ore and lithium, with larger allocations to base metals, while remaining neutral on gold.

Two standout positions for Alphinity are Mineral Resources (ASX: MIN) and Alcoa (ASX: AAI).

Mineral Resources (ASX: MIN) offers exposure to both iron ore and lithium, but importantly presents a compelling deleveraging story as the company strengthens its balance sheet. The primary non-commodity risk is CEO succession, which we've actively engaged on with the Chair to ensure appropriate planning.

Alcoa (ASX: AAI) provides exposure to aluminium, where the upside potential remains more under-appreciated than copper. The combination of aluminium price strength, the company's ongoing cost reduction initiatives, and potential Canada-US tariff relief could drive substantial earnings upside beyond current market expectations.

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Alphinity Australian Share Fund

Australian Shares

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