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Commodity prices are like a rose: Sweet at the centre but with petals stretching to who knows where. The prices go up and down at different times. It’s no easy investment choice for retail investors. But commodity stocks are hot. Some investors opt for the physical commodity – gold coins or platinum jewellery. But most are invested in ordinary unit trust funds. What’s the outlook here?
“We’re approaching the end of the short-term commodity cycle. Who will be the winners and losers?” asks Clyde Rossouw, manager of the Investec Opportunity Fund. His argument is that cheap money from the United States has chased asset prices up in emerging markets and many other countries to the point where they’re now battling to contain inflation. He sees a similar cycle approaching South Africa. “SA’s turn will come. Rising interest rates towards year-end seem likely.”
Daniel Malan, portfolio manager at RE:CM, has a similar view about the overseas effect. “Commodity markets have attracted a lot of capital from around the world. It’s an easy sell story. China and India want commodities but the world will run out of commodities. So investors pile in.”
Plexus Asset Management chairman Prieur du Plessis points out that due to the disasters in Japan, resources-related stocks have substantially underperformed on the JSE and in developed markets worldwide. “The FTSE/JSE resources index retreated by close to 11% from its February high against the FTSE/JSE All Share Index’s drop of 4,4%. On a like-for-like basis, resources stocks are down by more than 8% in US dollars terms compared to the MSCI world index’s 1,8% and the All Share Index’s 1,6%.”
Du Plessis reckons the Glencore listing and its size played a major role in the severe underperformance of mining groups – such as Anglo American and BHP Billiton – due to fund managers rebalancing funds. For that reason he sees an opportunity in a resources stock like Anglo, trading at an earnings multiple last seen in the 2008 liquidity crisis.
“In our investment world we focus on what stinks. Greece and the PIIGS in our offshore fund – in fact, the whole of the European bloc,” says Malan. “The spin is that commodities are the place to be and emerging market-weighted cyclical shares.”
He says that, broadly speaking, emerging market shares are still at a premium to developed market shares. “That’s why we hold Johnson & Johnson: it’s our second largest global holding. I get exposure to emerging markets – more than 40% of their turnover comes from outside the United States – at a developed market price.”
But Du Plessis adds buying companies at developed market prices isn’t a strategy, just where RE:CM thinks it can find value. Would it find value in commodities trader Glencore? “The short answer is no. We can’t find much value in it since its listing.”
What has RE:CM been buying?
“Sasol about 18 months ago, which has proved to be a good investment. And, more recently, some acquisitions in the platinum sector. We’re struggling to find good value in SA. We’re still finding good value overseas but not as easily as before.”
Commodity companies RE:CM does hold are Harmony Gold and Omnia. On the global side it’s invested in BP. But no coal companies.“Anything that excites individuals in a broad sense is unlikely to excite us. But what depresses investors is likely to excite us.”
“We’re approaching the end of the short-term commodity cycle. Who will be the winners and losers?” asks Clyde Rossouw, manager of the Investec Opportunity Fund. His argument is that cheap money from the United States has chased asset prices up in emerging markets and many other countries to the point where they’re now battling to contain inflation. He sees a similar cycle approaching South Africa. “SA’s turn will come. Rising interest rates towards year-end seem likely.”
Daniel Malan, portfolio manager at RE:CM, has a similar view about the overseas effect. “Commodity markets have attracted a lot of capital from around the world. It’s an easy sell story. China and India want commodities but the world will run out of commodities. So investors pile in.”
Plexus Asset Management chairman Prieur du Plessis points out that due to the disasters in Japan, resources-related stocks have substantially underperformed on the JSE and in developed markets worldwide. “The FTSE/JSE resources index retreated by close to 11% from its February high against the FTSE/JSE All Share Index’s drop of 4,4%. On a like-for-like basis, resources stocks are down by more than 8% in US dollars terms compared to the MSCI world index’s 1,8% and the All Share Index’s 1,6%.”
Du Plessis reckons the Glencore listing and its size played a major role in the severe underperformance of mining groups – such as Anglo American and BHP Billiton – due to fund managers rebalancing funds. For that reason he sees an opportunity in a resources stock like Anglo, trading at an earnings multiple last seen in the 2008 liquidity crisis.
“In our investment world we focus on what stinks. Greece and the PIIGS in our offshore fund – in fact, the whole of the European bloc,” says Malan. “The spin is that commodities are the place to be and emerging market-weighted cyclical shares.”
He says that, broadly speaking, emerging market shares are still at a premium to developed market shares. “That’s why we hold Johnson & Johnson: it’s our second largest global holding. I get exposure to emerging markets – more than 40% of their turnover comes from outside the United States – at a developed market price.”
But Du Plessis adds buying companies at developed market prices isn’t a strategy, just where RE:CM thinks it can find value. Would it find value in commodities trader Glencore? “The short answer is no. We can’t find much value in it since its listing.”
What has RE:CM been buying?
“Sasol about 18 months ago, which has proved to be a good investment. And, more recently, some acquisitions in the platinum sector. We’re struggling to find good value in SA. We’re still finding good value overseas but not as easily as before.”
Commodity companies RE:CM does hold are Harmony Gold and Omnia. On the global side it’s invested in BP. But no coal companies.“Anything that excites individuals in a broad sense is unlikely to excite us. But what depresses investors is likely to excite us.”
