The commodities comeback

published 23 January 2014

The annual moment of truth has arrived. Companies are publishing their numbers for the full year of 2013 and it is time for us all to "brace for a moment of particularly inconvenient truth", says John Authers in the Financial Times.

Profits aren't rising fast enough to justify stock-market valuations. The market soared last year forward earnings multiples are about 16 times at the moment. That's "well above the historical average" of more like 13 times.

It's also worth noting that, since 1976, the price/earnings ratio has only been above 17 for about 5% of the time so the market rising from these levels without a huge surge in profits would be pretty unusual.

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Worse, according to strategist Andrew Smithers, the Cape ratio and Tobin's Qboth tell us the same unsettling thing that equities are knocking around the levels at which they peaked in 1936 and 1968. Those peaks were followed by "a weak economy and very poor equity returns". Oh dear.

Still, despite this, Smithers, rather like us, figures that shares are more likely to go on rising than to fall "for the time being". Why? Regular readers will know the answer: a bit of momentum and a whole lot of printed money.

Our advice then remains as it has been for some time: be in the market, but be in the cheapest parts of the market you can find. Over the last few years that has taken us all over the place from the most rubbish parts of Europe to Russia and South Korea. However, now we are beginning to think it is time to look again at commodities.

There is now, as James Mackintosh points out in the FT this week, a "received wisdom" in the market that the commodity supercycle is over. Dead, gone and never coming back. Commodity prices are destined to be flat at best, fast falling at worst.

That's why the Canadian dollar has fallen 17% against the dollar, why the Aussie dollar hasn't been far behind, and why investors in mining companies had a shockingly awful 2013.

It is also why most people now firmly believe that no one in their right mind would invest in commodities, in companies connected to commodities, or, for that matter, in anything in the big commodity-exporting countries.

We love this kind of cosy consensus. It gives us something cheap to bet on. You can see the full case for buying into the "attractively priced" mining and big energy sectors (something we began to suggest very late last year), where David C Stevenson looks forward to a "full throttle rebound in commodity stocks" and points to the three funds he reckons will make you real money when it comes.

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.