The bullish case for the commodities
Are these stocks really irresistible? Matein Khalid explains
As synchronised global growth accelerates in 2018, a continued rally in industrial metals, energy and soft commodities is expected for the rest of the year.
As synchronised global growth accelerates in 2018, Chinese GDP growth hits 6.5 per cent and US wage inflation rises well beyond three per cent, a continued rally in industrial metals, energy and soft commodities becomes my base case scenario for 2018. Dr Copper, the red metal with its doctorate in economic cycles, gave us a vision for the future as it surged 32 per cent on the London Metal Exchange in 2017. Nickel, aluminium and, above all, palladium (up 50 per cent) confirmed this trend. This is the reason I recommended investors buy the shares of FreeportMcMoran, the world’s largest listed copper producer, at 12.70 last March. Freeport is now 20, a 57 per cent profit in nine months for my valued readers.
The 10 per cent fall in the US Dollar Index makes metal and energy firms irresistible to me, as their cost of production in local currencies rises. Take Dr Copper, for instance. The world’s largest copper producer is Chile’s Codelco and the strike in the Escondidas mine kick started the rally as the market has gone deficit at the precise moment Chinese demand explodes due to new electronic vehicle applications and pollution control becomes a political priority for President Xi’s Politburo.
The protests in Iran, the widest sine the regime crushed the Green Movement uprising in 2009, are hugely bullish for the price of crude oil. Trump could well tear up Obama’s Iran nuclear deal and the world would face a geopolitical supply shock, amplified by events in Libya, Nigeria, Venezuela and Qatar. The oil shock of 1979 coincided with the protest in Iran that culminated in the last Pahlavi Shah’s loss of his Peacock Throne. Could history repeat itself in the Brent crude spiral in 2018? Absolutely.
Saudi Arabia and Russia both have an economic and political stake in higher oil prices. Putin faces reelection in March and needs to distribute petroroubles to the Kremlin siloviki (men of power) clans. Saudi Arabia needs to boost economic growth, reduce the kingdom’s budget deficit and engineer a successful IPO of Saudi Aramco. A Saudi-Russian output pact has led to a surge in Brent crude from $28 in February 2016 to $67 now. A sharply weaker US dollar, blowout Asian demand and now a geopolitical supply shock in the Gulf can well take crude oil to $80 a barrel. Note that gold has crept up above $1,300 an ounce even though the Yellen Fed has been adamant about its planned 2018 interest rate hikes. When US inflation rates begin to accelerate, metal and energy prices go ballistic. True, 2018 will be the year US shale oil output tops 10 million barrels a day and the oil’s swing producer is now the Permian Basin in Texas, not Ghawar in Saudi or Burgan oilfields in Kuwait. Yet add Iran and the calculus for higher crude oil prices become compelling, unless the Powell Fed panics, hikes the Fed Funds rate four or five times and King Dollar soars.
I have historically “locked in” on embryonic bull markets in commodities via trading the West Texas/copper contracts on the New York Merc or Brent in London. Yet futures trading demands real-time access to the exchange (three per cent margin can mean instant ruin on an adverse position) and should never, repeat never, be attempted by non-professional investors. If you feel an urge to trade commodities futures, my advice is to go to Jumeirah Beach at sunset, chill out and relax until the urge goes away. I know too many poor souls in Dubai wiped out by colossal losses on margin trading futures accounts. The S&P Goldman Sachs Commodities Trust is a far less riskier exchange traded fund listed in New York. I am also long the single commodity exchange traded funds in copper and silver.
Note my enthusiasm for commodities exporter Argentina, profiled in successive columns after President Macri ousted the Peronists in late-2015, settled the Paris Club creditors and led to a $30 billion bond issuance spree in 201617, was vindicated with a vengeance. Argentina was the world’s best performing stock market in 2017, up 74 per cent. Hola, jefe!
A safe macro call is to accumulate the shares of the Big Oil supermajors. West Texas crude has risen above $60 for the first time since June 2015. Yet oil and gas supermajors (the Seven Sisters) are not priced to reflect the new realities. I want high output growth, share buybacks, long-life reserves, LNG trains on steam. This leads me to France’s Total, Britain’s Royal Dutch Shell and California’s Chevron. The Prize!