- “History tells us that commodities could once again be a great place to seek high returns”: Goehring & Rozencwajg
- Commodities now enjoying super profits after years of underinvestment include lithium, coal, oil and gas
- Which products could be next to run?
Recession-anxious investors should look to allocate cash to mining and energy stocks, which “could be the only thing that protects capital in years to come,” according to New York fund managers Goehring & Rozencwajg.
Recession fears loom large among investors.
After 40 years of falling interest rates and rising stock prices, the decline in bonds and stocks caught most investors off guard, Goehring & Rozencwajg say in their last comment.
“Equities and fixed income sold simultaneously as investors began to price in a period of both low growth and high inflation,” they say.
“The long-loved 60/40 portfolio (the industry standard in which an investor allocates 60% to equities and 40% to fixed income securities) had its worst six-month stretch in 40 years, wiping out trillions of dollars of value in just a few months.”
Are mining and energy stocks our only hope?
It’s no wonder investors are wary of resource stocks, which are extremely economically sensitive.
Oil is down nearly 30% from its June high of $120 a barrel, and copper – the metal that rises and falls with the health of the broader economy – suggests a global recession is on the way. profile.
Copper’s use in infrastructure and cabling means it is a good barometer of economic activity, so downturns in the global economy should have a pronounced effect on the metal.
But offloading mining and energy stocks right now would be a mistake, say Goehring & Rozencwajg.
History tells us that the general economic cycle often does not correspond to bull and bear commodity markets.
In fact, throughout the 20th century, resource stocks have been good investments during most recessions.
The GFC was an anomaly here, they say. Approaching the GFC, the two cycles were in near perfect alignment.
“While natural resource stocks crashed during the Global Financial Crisis (GFC), commodity markets today bear no resemblance to 2008,” Goehring & Rozencwajg say.
“Investors using the 2008 GFC playbook risk selling commodities at lows, missing out on the huge potential returns embedded in these markets over the next decade.”
Case Study: The Great Depression
For most of the past 120 years, the commodity cycle and the economic cycle have been completely out of sync.
The Great Depression of the 1930s, for example, was unparalleled in severity.
“Wholesale prices crashed 30% and the stock market fell 86% from its 1929 peak,” Goehring & Rozencwajg say.
“Stocks did not recover to their pre-crash highs of 1929 until 1954.
“Even taking dividends into account, whoever invested in 1929 did not break even until 1946.”
And yet the resources shone.
A simple portfolio of equal positions in gold mines, oil producers, base metal miners and agricultural companies built up just before the stock market crash in September 1929 more than doubled a decade later, they say.
“By comparison, at the end of the period in 1937, the total return of the S&P 500 was still down almost 50%.
“In 1946, when an investment in the S&P 500 finally reached pre-crash levels, the same portfolio of natural resource stocks had tripled.”
What is the natural resource capital cycle?
How could an economically sensitive stock portfolio lead the market through the worst economic meltdown in history? The answer is the natural resource capital cycle, according to Goehring & Rozencwajg.
A commodity price cycle generally follows a typical path.
A – The industry is going through a period of very high energy or metal prices, which results in a period of higher than normal profits.
Of them – These high returns are attracting new capital “and before long, the industry will begin a new cycle of exploration and development”.
Three – But, over time, this increased investment leads to new supply that eventually outpaces the growth in demand. This leads to a period of raw material surplus.
Four – Commodity prices fall, leading to the mothballing and cancellation of projects underwritten at higher prices.
“Often another industry or investment strategy falls out of favor at this time and investors rush to reallocate capital to new hot speculative areas, leaving the resource industry even more capital hungry,” Goehring & Rozencwajg.
Five – Supply then wanes, demand increases, and over time excess inventory is eventually eliminated.
The stage is now set for the next bullish cycle to begin.
This bull run could be bigger than the Great Depression
Look at the table above. The radical undervaluation of commodities and commodity-related stocks is greater today than it was in 1929, and the level of capital starvation is just as significant, according to Goehring & Rozencwajg.
“History tells us that commodities could once again be a great place to hunt for high returns, even if the 2020s see a period of economic turbulence as severe as the Great Depression – a scenario we consider unlikely.
“Investing in natural resource stocks when commodities are cheap relative to financial assets is important, not only from a value perspective, but also because it almost always corresponds to a trough in the investment cycle. in natural resource capital – a cycle that produces years of supply shortages that is fixed only after years of increased spending.
There are many examples of this in 2022.
Commodities now enjoying super profits after years of underinvestment include lithium, coal, oil and gas.
Which products could be next to run? Years of underinvestment and bright prospects make commodities like uranium, copper and nickel likely contenders.
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