Market Musings 130221: Is Black Gold Back in Vogue?

13th Feb '21 by Edmund Shing

24 comments 3448 reads

Is Black Gold Back in Vogue?

Summary:

Retail Revenge of the FAANGs: Can it last?
Why I am so keen on Semiconductors
Identifying the characteristics of a commodity super-cycle
Industrial Metals: Copper and Tin
Unfashionable oil to make an unlikely comeback?

The FAANGs Bite Back

So I was wrong in saying that big tech in the US was at risk of a correction. At least so far. What is quite clear is that I have underestimated the power of the retail investor, at least in the short term. If we look at equity fund flows over the last month they've been incredibly strong.

EPFR reports strong flows into equity funds last week

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Source: EPFR

According to EPFR, global equity funds have seen something like $58 billion of net inflows over the last week, which is one of the highest levels of inflows seen in many, many years. This may well highlight the euphoria that is starting to develop amongst retail investors. The same euphoria that I've previously pointed out exists also in other areas of financial markets, including cryptocurrency, SPACs, IPOs and hydrogen stocks.

However, there is a great phrase uttered in the last cycle (2007) by Chuck Prince, who was then CEO of the American bank Citigroup. He basically said that: “As long as the music is playing, you’ve got to get up and dance”. That's a little bit how I feel today. Yes, there are signs of over exuberance and euphoria creeping into different corners of the financial markets. But this trend is likely to continue, so long as central banks and governments continue to support the economy by flooding it with liquidity and spending.

This could be added to in the weeks and months to come, should the current lockdowns and restrictions related to COVID be progressively lifted, and allow households to finally spend some of that extra cash that they've been saving up. Recall that in the US, households have saved an excess of $1.5 trillion in their bank accounts over the last few months. Some of this money will be spent. Some of it will probably be invested. And when it is invested some of it is likely to make its way to the stock market, given how unattractive various areas of the bond market appear today at ultra low yields.

Note, for instance, that globally, something like…

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Big Dog

13th Feb '21

Interesting read Edmund and echoes where I have been investing recently.

Re semiconductors I particularly like NVIDIA re the potential upside if the ARM holdings acquisition comes off. I see this as a good fit as well as a ?distressed discounted sale price by Softbank of ARM. I also like Micron as it seems to be at a discount to its peers. The Van Eck ETF seems to be bang on the money re NAV. I guess my concerns would be whether the news is already priced into the PE? if I look at the sector as a whole.

Re oil, Cairn Energy (LON:CNE) ticks that box for me re midcap producer, the uplift in crude doesn't seem to have been factored in yet, they have a large cash pile and they also have the prospect of payment from the Indian Government re the recent arbitration in their favour, the amount being approx the current market value if paid in full. Are you concerned about the 'distressed asset' piece and about rotation out of environment unfriendly stocks? The bigger companies are concerned enough about this to be greenwashing. Not sure the smaller producers can follow suit and whether that means that investment in this sector will end up being focused on companies with a green play as well

Re miners, I like a lot of them at the moment. I have added Sylvania Platinum (LON:SLP) Ferrexpo (LON:FXPO) and Evraz (LON:EVR) with a wild punt on Amur Minerals (LON:AMC) but I was also watching an interview with Charles Plowden today extolling the virtue of Rio Tinto (LON:RIO)

Tombholliday

Thank you interesting

Dojosan

A large % of pf on commodities since I became aware of the potential inflationary pressures + EV revolution. I've gone into Horizonte Minerals (LON:HZM) - nickel - waiting for news anytime soon , Bacanora Lithium (LON:BCN) - Lithium - fully funded for construction of mine, Mkango Resources (LON:MKA) - rare earths - awaiting for BFS , KDNC - EV play (re-rating imminent) , £RMM - copper play (under the radar and undervalued) , Arc Minerals (LON:ARCM) - copper play (awaiting imminent news on possible agreement with £AAL , Sylvania Platinum (LON:SLP) and Tharisa (LON:THS) - pgm's - pgm / iridium / rhodium prices nearing / if not at all time highs

Michael Tee

Edmund,

Thanks. Really interesting to read as usual.

Michael.

William K

14th Feb '21

Thanks Edmund. As always I enjoy, and benefit from, your top down approach and sector analysis. Most of what I buy these days comes in the form of ETFs (often the US equivalent of the ones you've named), although I have recently bought $TSM, $RIO and Anglo American (LON:AAL) for the reasons you mention. As you say, with inflation looming and a scarcity of commodities, it's probable that the price of commodities will rise, to the benefit of commodity producers. And the consumer discretionary sector should boom when the lockdowns end and people get desperate to go out and spend some money.

As a side observation the US version of the cyber security fund ISPY is called HACK - both great names for cyber security.

Many thanks again and have a great week.

dmathot

Article génial, j'adore et merci pour ce gros travail d'analyse

mblackstock6

@Edmund - I liked the look of ISPY too but it's current top holding is Blackberry?!

Blackberry is only 2.7% so it's not going to upset the balance unduly. See below:

Momoko Miyamoto

China is going all out to develop domestic semiconductor manufacturing capacity and history suggests that it will suceed in driving prices down. This doesn't bode well for the currently highly rated big chip players.

JohnEustace

Wafer fabs are becoming extremely capital intense with TSMC talking about costs of $20bn per fab in the near future. The Chinese haven’t been able to match ASML in lithography so are limited to more mature technologies. US sanctions are likely to restrict their ability to buy in equipment.
So I know many people in recent years have badly underestimated the Chinese abilities to develop their technology and I have no doubt they are putting every effort into this by their own efforts and through espionage. But even so think it will be a few years before they are in a position to flood markets even assuming a thaw in China US relations allows this. I think it’s more likely the US would allege they stole the technology and apply sanctions.
The white swan event would be China invading Taiwan. Without TSMC the West has the problems. Hence the US getting them to invest$12bn in a plant in Arizona.

I think that depends which data provider you are using. Bloomberg today has Blackberry top at 4.1%. It has been one of the Reddit trades so that has been driving the share price all over the place.

The Phoenix

Outstanding as always Edmund. I'm with you I think commodities are a great play in terms of value and future demand, I seem to remember reading somewhere that if Tesla do hit their 20 million car target they would use up all the current world annual copper production.

Commodities should also be a good hedge against inflation I wonder if we may finally see it filter down to the Janet and John consumer this time round, the last fifteen years its been asset price inflation but relatively masked on the high street.

This time we have the QE trillions unleashed in nuclear fashion that makes 08/09 look like getting a round of beers in plus we have the pent up consumer billions saved and the worst supply chain situation for years due to covid so when we unlock I can see massive demand and lack of supply compared to pre March 2020.

This might be the trigger that finally brings markets down as inflation is probably the only economic situation that can't be cured by hosing even more QE trillions and would make the problem worse, petrol on a raging fire.

Would be interested in what other sectors you would view as defensive as it seems even down to BBB grade there is no yield and would be interesting to get your view on when you think interest rates may rise and how much say 0.50% would knock off a corp bond fund holding say BBB and above.

I currently hold Central Asia Metals (LON:CAML): and Blackrock World Mining Trust (LON:BRWM) as commodity plays.

Regards Andy

Less97

Good article and graphs Edmund, Thanks for sharing with us!

hole73

16th Feb '21

@mblackstock6 - my (limited) understanding of Blackberry is that they've transformed themselves from a focus on handsets into a cyber security company. There are some interesting background articles on the web

https://www.eweek.com/security...

https://www.information-age.co...

Interesting. Thanks. I think I'd go with Bloomberg on this one.

Philip999

With regards to the wider commodity market, I generally don't try and buy individual miners or producers. I've opted for for long dated options via the iShares S&P GSCI Commodity Indexed Trust, this covers a the broader market and saves me valuable time trying to research various companies.

Whilst I'm happy with this choice it does irk me as I don't get the benefit of dividends if I was to opt for some of the individual commodity companies. Can anyone suggest a fund, etf... vehicle where it's possible to gain exposure to the commodity bull market and benefit with some income as well?

Many thanks

Phil

17th Feb '21

Blackrock World Mining Trust (LON:BRWM) pays a dividend of around 4% and gives diversified exposure to world mining.

Thanks Wilkonz, funny that came out to be my number one choice having read up on various options last night. My iShares S&P GSCI Commodity Indexed Trust is a bit heavily weighted to oil for my liking.

LongValue

Oil. A dirty word to some and certainly a dirty word to many investors in recent years (Including me). However, it’s not only the price of oil that impacts oil companies. Faced with a collapse in oil prices, the price of WTI even went negative for a short time last year, oil companies have heavily invested in new technology. They are generally leaner and more efficient than ever. Moreover, many are moving from “Big Oil” to “Big Energy”. And have the know-how to combine commercial savvy with engineering skills.

The broad impression I have is that most Governments are primarily concerned with the reliability of energy supplies rather than the price (At least within certain parameters). Large oil companies have a reputation for delivering major projects on time and to budget. For example, BP has partnered with DiDi in China to roll-out electric vehicle charging stations. The latter may be unheard of in the West but has some 135 million users in China. The complexities, scale and strategic importance of such projects lend itself to oil majors. While they look set to benefit from a chronic lack of oil exploration (Ironically due to low oil prices). The relatively cheap oil coming out of the ground is not being replaced at the same rate by more cheap oil. What remains is often difficult to extract. From an investor’s perspective, the oil sector may go in the same broad direction as tobacco - good for established players (And their investors) but not worth new entrants getting involved, at least not on a large scale. For BP that means a clear commitment to a quarterly dividend of 5.25¢ and share buybacks.

Oil appears to be on the way out. But, in my opinion, that time frame is long. It requires replacing some 1.4 billion cars, currently using internal combustion engines. As well as replacing and redesigning the global fleet of planes and ships. That doesn’t even go near the use of petroleum in the plastics industry. Or the entire defence sector - tanks, jets, etc.

For the moment, in terms of energy density, oil gives a lot of bang for the space it uses compared to batteries. Electric vehicles also appear to have range issues in extremely cold weather. As it happens, I think engineers will overcome both problems but, again, it’s a question of time. Large oil companies are adapting - they have no choice.

And, yes, I am an investor in BP (LON:BP.)

tennis321

19th Feb '21

Excellent summary of the assets currently in demand. A big risk to investing in select companies is the capital raises at big discounts. As we have seen lately with banacora and horizonte. Maybe ETF's are a better way to play this theme?

Market Musings 130221: Is Black Gold Back in Vogue?

Is Black Gold Back in Vogue?

The FAANGs Bite Back

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Edmund Shing

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