The commodity supercycle … supported by inflation outlook

Well, the third most important asset class and one that is sometimes overlooked, is one that must be included in a properly diversified portfolio and in the right measure of the investor profile. Since the lows of the pandemic, these matters have shown an upward path difficult to ignore. The reasons behind there are several, between disruptions in the production chains, the demand of industrialized countries to jump on the bandwagon of economic recovery, the large volume purchases that China has made in some materials, even the current inflationary pressures, all add up.

There is a strong momentum for all of them, both for metals, oil and agriculture, as we discussed in the note “Inflationary pressures portend tensions in commodity markets”, or the most recent “Gold is not and neither is silver …” The elasticity of demand for some materials is highly related to economic changes. If conditions continue to point towards “normality”, demand will continue to increase as will prices. Demand is red-hot due to the strong recovery supported by vast stimulus programs, so much so that cargo ships compete for space, as seen in the Baltic Dry index, at its highest since 2010:

Investing in agriculture may seem like a good strategic move. After all, whether the overall economy is in recession or booming, people still have to eat. Because of this, investments in agriculture and livestock are viewed by many investors as recession-proof. Furthermore, the world’s population is increasing and agriculture will play an increasingly important role in sustaining global societies.

Additionally, as Cobas points out, from the fundamental point of view the decade of low prices of raw materials reflects the lack of investment in capacity by producers, which limit the offer. Given the improvement in the prospects for demand, the stocks of basic products that by necessity have been allowed to decrease is time to rebuild them, but it is not so easy, since the supply does not adapt quickly to the needs of the demand as it takes years investment, extraction or drilling in order to achieve the necessary increase to reduce supply deficits.

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All eyes are on oil and gas companies, Marlen Shokhitbayev of Scope believes. Its transition towards generating energy in a more ecological way weighs on its future. In fact, recent events at some shareholders’ meetings, such as ExxonMobil or Chevron, “will lead to faster and deeper transformations of their operations.” However, as they adapt their business, they are helped by the rebound in oil and gas prices. In fact, “if oil and gas prices stay above $ 60 / barrel, we will see strong free cash flow generation even after dividends, exceeding 2019 levels, when Brent averaged $ 64. /barrel”,

Cobas AM bets on copper, liquefied natural gas and oil

The copper It is behind not only the energy transformation as electric vehicles need 4 to 5 times more copper than traditional combustion vehicles, but it is also present in the construction industry that today is one of the main consumers of copper ( wiring, water and gas pipes, thermal systems, etc). All the fiscal stimulus plans through infrastructure programs that governments are implementing will increase demand, so it is foreseeable that the demand for this metal will more than double between now and 2050. To date, there are few new large copper mines that come into production during the next decades that can absorb this increase in demand.

With respect to liquefied natural gas, the Spanish value manager considers that being considered in some way as the transition energy towards renewable energies offers investment opportunities. Demand from Asia has been growing at a rate of 9% compounded per year since 2015 and its growth over the current decade is estimated to be around 4% compounded per year. The bulk of our investment is focused on infrastructure assets and long-term contracts, which offer us some visibility of future cash flows and which, despite the fact that their behavior to date has not demonstrated this, we believe that they should behave accordingly. a more defensive way given the nature of business.

And finally in the Petroleum Cobas investment is based not so much on its price but on Capex. Bearing in mind that the demand for oil is not discretionary and is relatively inelastic, as oil is an absolutely necessary good for the day-to-day life of our society. Cobas comments that they do not invest in oil as a commodity, but through service companies and beneficiaries of the necessary investment in Capex necessary for its extraction as demand returns to pre-pandemic levels that will cause there not to be enough supply to meet a certain level of demand, prices will rise and will generate incentives to re-invest in the sector.

To this vision of Cobas adds UBS that in one of his last notes he comments that the cyclical recovery will see commodity prices benefit from an environment of new highs in the purchasing indices of the manufacturing sector in the US, Eurozone, UK, Australia and Japan that point to growth rates in activity faster than China.

For its part, Fidelity is somewhat more cautious and comments that the relative good behavior that all raw materials have recently shown, from copper to corn, will undergo changes and we will probably see further dispersion in returns from now on, and shows a graph with the movement of the prices of various commodities and the different directions they are taking despite strong gains overall. Emphasizes that lThe demand for metals and agricultural products is likely to decelerate due to the moderation of the growth rate in China and the end of the cycle of restocking worldwide, but we’ll see:

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