Come back to commodities
MoneyWeek has been bearish on most commodities ever since the financial crisis kicked off. But now it's time to buy back in, says Merryn Somerset Webb.
We were once very intense commodity bulls at MoneyWeek. Back in 2001 or so, around when we started trying to persuade you all to buy gold, we also got into the idea of the commodity supercycle. Then, prices of almost all commodities from sugar to silver were languishing at ludicrously low levels. Yet exploration had collapsed. There was very little new supply coming online, despite huge (and obvious) demand down the road from fast-developing emerging countries. Prices had to go up. And so they did.
We got nervous on all this a few years ago, and have been avoiding the industrial miners in particular for a while. This week, however, our cover storysuggests you might like to buy back in. We still think China will see a hard landing, and we still think the global economy is in a bit of a pickle growth-wise. No change there. But it is worth remembering a few things.
First, even a slowing or rebalancing China will still need a good supply of commodities to keep going. Second, commodities aren't all about China even as recently as 2004, Japan was the world's biggest importer of iron ore. And third, investing isn't about growth, it is about price.
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If you buy something for a price that already reflects every possible element of a happy future, you are highly unlikely to make money. But if you buy something at a price that reflects expectations of untold misery, it takes only one nice surprise to turbocharge your returns. Right now, many of the big (and the very small) resources companies we look at are very cheap indeed. Look at the Baker Steel Resources Trust in this week's cover story. Not only has its share price fallen 50% over the last year, but you can now pick up its shares at a huge discount to its net asset value. Which is nice.
Still not convinced? I have among the millions a note from Aviate Global on my desk. Their analysts point out that the price of shares in Rio Tinto usually tracks that of iron ore reasonably well. At the moment, however, the two are diverging: iron ore has risen to over $120 a tonne (well above analyst estimates for the year), but Rio shares have been gently falling for months. To Aviate, that doesn't make sense.
If you look at the iron-ore price and then add in "renewed cost control", the effects of a weak Australian dollar, and some growth of production, they say, it seems that we could easily be seeing a trough in Rio earnings. Assume this is so, says Aviate, and buyers will find they are able to pick up the shares at almost half the price-to-earnings ratio they paid at the bottom of the last trough in 2009.
All misery can be overdone. We aren't suggesting you pull your money out of everywhere else and pile it all into mining stocks, small or large. This is risky stuff. But for anyone with a contrarian streak, this seems as good a time as any to start buying.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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