Consensus is growing that the bottom of the mining downturn has passed - a view shared by Fortescue Metals Group chairman Andrew Forrest.

The recovery of the mining sector over the past six months has led companies, which have cut costs to the bone to improve profits, to start spending again out of necessity.

It's these "green shoots" that has UBS Asset Management Small Companies portfolio manager Stephen Wood convinced the sector is re-emerging.

"[Companies are now saying] 'We've stretched this rubber band as far as it's going to go'," he said.

While the price of key commodities including coal, iron ore and oil have surged since February, the Australian dollar has held relatively pat at about the US75¢ mark. It's bringing jobs back locally, particularly in the universe of businesses that supply everything from equipment to labour.

"Six months after the mining sector's turned, they start to see their business turning, and that's the green shoots," said Mr Wood.

Re-rating of stocks

The rapid rate at which companies have paid down debt has led to a re-rating of stocks in the space.

But while Mr Wood said he had been impressed by the run of key stock picks Fortescue Metals Group and Whitehaven Coal since the fund invested in February, he wasn't prepared to sell just yet.

"Even if the enterprise value of Fortescue stays the same, the last $4 billion of net debt will disappear and be replaced with equity, and that's worth at least another $1 in their share price," he said.

His comments come despite UBS investment banking colleagues and Citi earlier this month calling the top for big cap resources stocks. Fortescue shares surged 6 per cent on Tuesday as Chinese iron ore futures hit a two-year high. 

Mr Wood also said mining services companies had plenty of room to run. Even though the likes of Bradken have risen 750 per cent this year, takeover bids in the past month – including Hitachi's $688 million bid for Bradken and CIMIC's $524 million bid for UGL – are a sign that investors see plenty of upside.

"Selectively, the place to go now is mining services companies, even though they're off the bottom," he said, and Ausdrill was a key stock pick. 

Economic tailwind

Capital Economics' chief economist for Australia and New Zealand, Paul Dales, said higher commodity prices had turned into a tailwind for the economy.

"The constraint on economic activity in both [the Australian and New Zealand] economies from the two-year long decline in commodity prices appears to be easing," he said.

The drag on growth from private investment looks to have eased in the third quarter of this year, and a smaller fall in mining investment means total capex may have risen, supported by the still-strong housing construction sector, he said.

Mr Wood said his portfolio was positioning for a stronger economy on the back of continued infrastructure projects in NSW and Victoria, as well as a lift in the weaker parts of the economy whacked by the mining downturn.

With a rosier economic situation over the next 18 months, the fund is also positioning for interest rates to have bottomed, with that scenario supporting the case for no more rate cuts from the Reserve Bank of Australia, flagged by Treasurer Scott Morrison earlier this month.

Capital Economics is still tipping two more rate cuts to 1 per cent next year, on stubbornly low inflation.

"If you are of the opinion that interest rates pick up from here, you probably want to start to think about whether or not gold has done its dash for now," Mr Wood said, adding that while gold remains at record highs in Australian dollar terms amid a tightening rates environment, the commodity suffers.

"To increase your conviction look to inflation [out Wednesday], employment data and GDP numbers when we get them." Retail sales, particularly at Christmas, could lead to a more hawkish rhetoric from policy makers.