12th Mar '22 by Edmund Shing

14 comments 3204 reads

Market Musings 12/03/22:
Preparing the Buy List

Podcasts that might interest you:

Investing during times of geopolitical tension

Conflict in Eastern Europe causes turbulence in financial markets.
Do not panic! Good reasons to stay the course in stocks.
10%+ stock market corrections happen on average every 1.5 years.
What the 5 similar crises reveal: Always looks darkest before the dawn.
Defensive investment solutions for investors today.

Also available in Apple Podcasts, Podcast Addict, Spotify podcast platforms
(search for “BNP Paribas Wealth”)

Weekly Summary:

No clear evidence stock markets have bottomed
US consumer sentiment hits recessionary levels
Global food prices suggest shortages ahead, weighing on global consumption
Commodity rally: could be a long way to go yet
What you can buy now
Preparing a buy list for if/when stock markets stabilise and risks start to recede

1. No clear evidence that financial markets have bottomed

While the STOXX Europe and UK FTSE 100 indices managed small gains on the week, the US S&P 500, equal-weight Nasdaq 100, and emerging market stock indices (the EEM ETF) continued to decline.

US high yield credit, emerging markets and Nasdaq 100 all still falling

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Source: Tradingview.com

Tellingly, volatility levels (VIX, VSTOXX) remain very elevated and have not declined that much, crude oil prices remain worryingly high at around $110/barrel, and high yield credit (looking at the JNK and HYG ETFs in the US) continues to fall in tandem with US stocks.

Conclusion: too early to declare that stock markets are stabilising, at this point.

2. Inflation impact: US consumers feel the pinch

The monthly University of Michigan consumer sentiment survey tells us that US households are feeling the pinch in spite of strong employment and wage gains, as petrol, food and goods prices eat away at their discretionary spending power.

University of Michigan consumer sentiment at recession levels

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Source: Longview Economics, Macrobond

3. Global food prices hit a new high

A clear result of war in the “breadbasket of Europe” is record-high food prices across the world, particularly impacting wheat importers from Ukraine such as Egypt and Turkey.

FAO food price index hits a new high, higher than the 1970s in real terms

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Source: FAO

This will continue to feed through into higher food prices in the weeks and months ahead, given that the…

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BattleOfBrit

13th Mar '22

Thanks for another thought-provoking writeup.

I'm also very bullish about energy and most commodities and my portfolio is heavily concentrated in those. I'm starting to be concerned about how well some of the miners will do though. For example, I came across Atalaya Mining (LON:ATYM) after your StockSlam in February 2021 and in the Stock Pitch by Jack Brumby in June 2021.

Miners like this consume huge amounts of electricity, which we know has risen very steeply over the past year. I am starting to wonder if some of these miners will struggle to stay profitable, unless the commodity they're mining rises even more to offset the energy costs. For this reason, I'm more bullish about energy than miners, unless they're located in jurisdictions where they are shielded from the steep energy costs.

I'm also bearish about anything in the Euro zone, as they're seeing huge equity outflows which will act as a further drag on share price performance.

Albertos

Atalaya Mining (LON:ATYM)

Was unnerved reading this in the TU of 13th January:-

· During December 2021 and the early days of January 2022, energy prices in Spain have increased significantly due to the sharp increase in wholesale European gas prices. Should the volatility and current energy prices persist for a sustained period, Atalaya expects that its operating budget and production guidance for 2022 may need to be revised.

· The Company is actively monitoring energy prices on a daily basis and is identifying potential measures that could be implemented in response. In the event that energy prices remain at elevated levels for a sustained period, possible measures could include temporary modifications to the mine plan, curtailment of throughput during periods of peak energy prices or reductions in discretionary expenditures."

(Subsequent director sales led me to be sitting on the side-lines awaiting the full year results)

Like you I'm resource heavy at the moment but it made me look to ensure they were low cost producers.

Also it makes Royalty companies seem more attractive as they are not exposed to costs - currently hold £APF (Anglo Pacific - £ didn't work) and am looking for more.

Phil

(Thanks Edmund for another thought provoking post!)

Paul2148

if you look at the recent director sales, these were option linked and amounted the cost of exercising those options. In other words, they have held on to the rest and merely covered their own costs.

it will be interesting to see what headwinds are discussed in the forthcoming results and how these may be mitigated by both the E-Lix plant currently being built ( https://atalayamining.com/blog...) and the 50MW solar plant currently in permitting stage.

Both of these should greatly help margins and with the copper price holding up, Atalya could look to be a good play.

Rusty2

Just had a look at Spains electric generation, seems around 18% comes from gas, so not sure why electric prices went up so much in 2021. The surprise is only about 8% comes from Solar, wind is around 23%, nuclear 21%, there is some hydro, renewables account for around 44%.
Do Atalaya Mining (LON:ATYM) produce any of their own electric via wind or solar?

I've heard the solar plant has got the permission and construction has started - not aware of the time to commissioning.

I believe the solar plant will be operational in 2023. It will support about 25% of the power requirement.

Cuthbert C

Having sold most of my holdings in the run up to the invasion of Ukraine, I agree with the thinking about maintaining exposure to the energy sector. I'm currently holding 3 energy related companies which are all very different.

1) Bluefield Solar Income Fund (LON:BSIF) - Bluefield Solar Income Fund - a closed ended investment fund - mcap 650 million - assets are 75% UK solar energy farms and 25% wind farms. Dividend yield > 6% (for some reason Stockopedia shows a lower yield but I think my figure is correct). I regard the dividend stream as completely secure because of long term contracts. BSIF also provides exposure to rising electricity prices, potential to benefit from moves to reduce dependence on fossil fuels, potential for modest capital gains, potential for expansion of the underlying business. NB: It looks like BSIF's financials have not been accurately transcribed into Stockopedia - sales revenue is shown here as 786k when it should be more like 78 million! Quite a discrepancy.

2) Riverstone Energy (LON:RSE) - Riverstone Energy Ltd - a closed ended investment trust - mcap = 350 million - focussed on a wide range of energy related businesses including oil and gas, renewables, technologies for electric vehicles etc. etc. This provides well diversified exposure to rising energy prices. Doesn't pay dividends. Seems to be finding favour in the past week or so.

3) I3 Energy (LON:I3E) - a small E&P - mcap 230 million - generating bucketloads of cash from a portfolio of onshore oil and gas fields in Canada. These assets are low risk and have lots of scope for being developed to increase production by a multiple. Operations in the field seem to be well managed and efficient. Also has assets in N sea awaiting appraisal and development. Just announced a farm-out for the Serenity field in the N Sea which will be appraised later this year at little or no cost to i3E. Pays dividends on a monthly basis - was equivalent to 7% at the time of the recent announcement but the SP has risen since then so you do the math. Stockopedia characterises this as a "momentum trap" but that looks to me to be misguided perhaps because of an anomaly in their algorithms? Certainly does not reflect the underlying fundamentals in my opinion. Recent analyst reports calculate a value of 30p/share for the core operation with a potential for an additional 40p depending on the N Sea asset appraisal/development. That was based on oil prices below $80. The recent surge in oil & gas implies a significantly higher value. Current share price is around 20p so lots of scope. Momentum trap, schmomentum trap I say.

Silver Moon

14th Mar '22

Some forward-thinking miners have been arranging for solar farms on their plots. On a broader view there is no point in generating electricity if people avoid using it wherever possible.

Nursemaid

Very useful insight as usual. Thanks Edmund.

davidallen77

£glo said something similar about it gas plant in spain

I find that the ratings for small companies such as I3 Energy (LON:I3E) are often 6-12m behind. I expect they will change once they publish some accounts with the full year of the Canadian assets - maybe somebody from Stockopedia can confirm this. I think they only purchased some of those assets last year.

Mark B

15th Mar '22

you say if and when markets do stabilise, please explain the IF as history tells us it is always WHEN. IF means the world is finished as we know it, WHEN means that this, like all things is transitory, we just do not know how long.

Stonethecrows

16th Mar '22

Atalaya Mining (LON:ATYM) I believe they have a renewable energy project of solar energy which will supply some of their needs . That should offset some of the costs.

Edmund Shing

Absolutely right Mark, it is just really a question of time...

Market Musings 12/03/22: Preparing the Buy List

Market Musings 12/03/22:
Preparing the Buy List

Podcasts that might interest you:

Weekly Summary:

1. No clear evidence that financial markets have bottomed

2. Inflation impact: US consumers feel the pinch

3. Global food prices hit a new high

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

14 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 12/03/22: Preparing the Buy List

Market Musings 12/03/22:Preparing the Buy List

Podcasts that might interest you:

Weekly Summary:

1. No clear evidence that financial markets have bottomed

2. Inflation impact: US consumers feel the pinch

3. Global food prices hit a new high

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

14 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 12/03/22:
Preparing the Buy List