16th Oct '21 by Edmund Shing

15 comments 2939 reads

Market Musings 16/10/21:
Consider the ultimate stock rotation:
Tech to Commodities

Recent podcasts you may care to listen to:

RIDE THE CAPEX BOOM AHEAD

Recent reports you may be interested to peruse:

Equities Focus: October 2021

Commodities have been a terrible investment since 2008

Quite clearly looking at the chart below, commodities have been a terrible investment since the middle of 2008, falling 75% over these 12 years. So why should we consider investing in commodities today?

Commodities have been an awful investment from 2008 to 2020

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Source: BNP Paribas, Bloomberg

Well as I like to say, every dog has its day. Just as I believe that cyclical value stock indices such as the UK stock market will be a long-term winner from here, I also believe that this will continue to be the case for the commodities asset class.

Since early 2020 in the depths of the COVID-19 pandemic, the Bloomberg commodity index has already recovered some 72%. But we also know that from 1999, commodity prices tripled to their peak in mid-2008. If we were to see a similar recovery in commodity prices today, that would suggest that we still have a very long way to go.

Metals are on a roll

With all the worries about supply chains and provision of inputs from manufacturing and services, one of the bottlenecks is evidently commodity production. This is exactly why today we not only see an exponential rise in energy prices (crude oil and natural gas), but also a set of multi-year highs in a number of base metals including nickel, aluminium, copper, and tin. It is therefore unsurprising to see that the LMEX index of 6 major tradable metals has indeed surpassed its early 2000 peak to reach new highs as of today.

LMEX major metals index hits a new all-time high

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Source: BNP Paribas, Bloomberg.
Note: LMEX index includes copper, nickel, zinc, aluminium, lead, tin

Ultimately, we are presented today with the combination of a) strong rebound in demand post pandemic and lockdowns, combined with b) the difficulties of companies to invest in new production to satisfy this growth in demand. Added to this of course, logistics problems both in shipping and trucking only make these issues more acute in the short-term.

But the…

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Will S

17th Oct '21

Trident Royalties (LON:TRR) is a smaller, aim traded royalty fund that has a broader portfolio of metals than just gold. I'm still researching it at the moment but it seems a sensible alternative to FNV and WPM

yiannos1

This is a great article and well done to the author for sharing it with all of us.

Perhaps an investment in CAPD fits well with the whole philosophy.

Any other suggestions are always welcomed.

Again , well done Edmund Shing.

JCAS

thanks Edmund I really enjoy these articles! I'm interested in peoples ideas on Trusts to play this sector aside from the usual commodity specialists such as Blackrock World Mining. Scottish Investment Trust Scottish Investment Trust (LON:SCIN) looks to have plenty of value/energy and miners so could be good...

Thornabian

It certainly provides food for thought but I think it is hard to put all tech in a group now as it was grouped in 2000.

Barriers for entry for certain tech names are incredibly high (e.g. Apple, Amazon and Microsoft) and they will continue to growth top and bottom line y-on-y.

I think the barriers to entry in metals isn't necessarily so high because requires capital but not patented IPs.

Some tech names certainly are harder to judge and may underperform mining stocks but with the return to normality in commercial flights, supply chains, central banks inability to raise rates before unwinding their balance sheets and the US Shale oil return to pre-pandemic levels comes lower oil and lower commodity prices as production catches back up to demand.

Similar thing happened post 2009 and even through a time when interest rates kept increasing, because Mega tech earnings outstripped rates rises but I think tapering will be higher and rate rises will be lower this time (just my personal opinion).

It will be a rocky ride but when is it not?

Andrew.

Just a quick chart comparison of Nasdaq100 vs Rio vs WTI oil 2009-2015:

Westway001

Thornabian, just to pose a question in reply - I haven’t had any investment exposure to US tech stocks for at least two years (more fool me in hindsight). Would I be wise to invest in it (eg Nasdaq tracker) now?

JohnEustace

Duke Royalty (LON:DUKE) do NOT invest in mining or resources companies. They are not an appropriate vehicle for the strategies in this article. I suspect they just got added to the list because they have the word royalty in their name.

I like Trident Royalties (LON:TRR) but they are at a relatively early stage. They haven't yet reached the inflection point where their flow of royalties is established enough to fund their future investments.

I hold Blackrock Energy And Resources Income Trust (LON:BERI) The discount has been narrowing nicely but its's still at 3.5%

Mega tech earnings coming up soon and growth seems set to continue.

There was a small correction in some Nasdaq 100 names (Activision Blizzard/Qualcomm etc. - I bought both on the 20-25% sell-off) but the index powers on, held up by the main three.

Long term, I just don't see many companies with the competitive advantage that Apple, Amazon, Microsoft etc have.

They generally don't go above more than 5x earning yield and move in relative tandem to earnings growth but sell-off around 3x earnings yield and stay in that quite tight band.

Wider corrections can always happen and it doesn't mean other companies won't generate great returns but I don't buy the argument mega tech is over priced per say either; certainly doesn't seem like a bubble with $ATVI at 18x forward PE and Apple not far off. Tesla is the obvious one which seems very stretched in valuation but it is 4% of the Nasdaq100.

Bouden54

18th Oct '21

Trident Royalties (LON:TRR) is nice way to get exposure to lithium which today hit a record high. Lithium makes up more than half their portfolio, although this will probably reduce over time as they add new royalties. Listening to a recent Q&A with management they're are quite opportunistic - they purchased the lithium royalty cheaply when lithium prices were very low last year. They have since surged so this royalty must have significantly appreciated.

sheeza

My favorite is Anglo Pacific (LON:APF), rather damned for its coal royalties but steadily divesting them - only a relatively small position left in coking coal which is giving high returns just now. Just bought a large cobalt royalty stream, and is concentrating on battery metals

Great article. I strongly feel commodities could be the big sector winner of this decade. You have a combination of tight supply because of years of under investment (due to the earlier collapse in commodity prices as well as the ESG factors); capital discipline with the big miners returning most of free cash to shareholders and not really investing in nee projects; ever increasing demand both from the urbanisation of Asia and investment in renewable energy infrastructure; very cheap valuations with FCF yields of 15-20% (higher for the smaller miners). On top of that they offer a good hedge if inflation does pick up.

Anthony127

Edmund thank you for your thought provoking article.

The economic circumstances do seem very similar to the year 2000. I wonder though whether there is one important distinction between now and the year 2000.

One limiting factor in this current scenario could be China. In the year 2000 China was basically a capitalist country with a communist label on it. During the last few months however China has been operated more like a command economy. An example of this is the Chinese Government restricting the usage of steel and taking action to control other commodity prices. Iron Ore prices have certainly reduced due to their action and the large miners operationally based in Australia don't seem to be doing terribly well.

China is the largest consumer of commodities in the world so its behaviour will presumably impact the commodities business model.

I accept that there are opportunities too including the US Infrastructure spending (once the bill is finally passed). Under the circumstances I'm left wandering whether the answer is to pick your commodities or your mining companies very carefully.

I would be interested to hear any further views on which areas could thrive taking into account Chinese intervention.

Rusty2

I also have concerns about China but more to do with their power cuts, reading that some factories will have to close for a few days a week which could effect commodity demand. This could have knock-on effects in the west as we have seen with the car industry.

Yes iron ore prices have certainly fallen.

Coal, gas and oil prices are strong due to supply and demand. Will probably drift down when winter is over.

Snowbum

Excellent article as ever, thanks Edmund.

Agree about the streamers…. I hold $FNV , Trident Royalties (LON:TRR) & $MTA - Metalla Royalty & Streaming - which is also worth checking out for those interested in the space.

Market Musings 16/10/21: Consider the ultimate stock rotation: Tech to Commodities

Market Musings 16/10/21:
Consider the ultimate stock rotation:
Tech to Commodities

Commodities have been a terrible investment since 2008

Metals are on a roll

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Edmund Shing

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