Hedge against QE
Next to the perspective of commodities being temporarily distressed by oversupply, commodities are also a good hedge against monetary unorthodoxy. While gold may be one of the best protectors against the unintended consequences of quantitative easing, other commodities may play the same role when central banks go beyond their limits.
It helps to check commodity prices in rouble terms over the last years to make this clear. While the Russian central bank printed money in response to Western sanctions, Russian investors responded by allocating to real assets, something they also did during Russia’s economic crisis of the ’90s. During distressed situations, real assets prove their value, as the graph to the right shows (‘BCOMTR commodity index in USD & RUB’).
Timing the exact moment of this turnaround is impossible, so the best approach is to put your eggs in different baskets. If you are not a commodities expert yourself, the most effective way to invest is by buying a good commodity fund which invests in futures. This will give you exposure to a combination of commodities with potential. Combining several commodities in a basket will dampen volatility.
Mine it for all its worth
A different way to address the commodity revival is to buy a fund which invests in mining and oil companies. As is mostly the case in a bear market, the sector has been deeply and indiscriminately punished. Knowing that low-debt, good-quality mining companies will survive this part of the cycle offers opportunities. These stocks trade at less than half their book value, and at just a couple of times the earnings.
Selecting funds with a bottom-up stock-picking strategy might give you the alpha you were looking for. Whereas investors with a preference for capital preservation will opt for pure commodity funds, value investors may have a preference for mining equity funds, in which deep value can now be found.
