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A possible alternative to stocks and bonds: Commodities?

Make a case that the stock market is not expensive these days means often dragging Tina into the conversation.

Tina is short of “There is no alternative”. It is an affirmation that after a decade of loose monetary policy and low interest rates, bonds, the traditional alternative to stocks, are no better deal than high-stock stocks.

However, there may be an alternative to stocks. Commodities are cheaper for most of the second quarter, adding to several years of mediocre-poor performance. Gold and silver were hit hard. So it was the materials that work for living, such as iron ore, copper, oil (and refined substances from it), although some of them have experienced late bounce back in the period as well as many agricultural products.

Ordinary investors may take positions in commodities through funds that hold them directly or hold shares of companies that are mining, producing or transforming. But should they? Prices have fallen, but have fallen enough?


Investment advisers are divided into goods that are about to reverse their poor performance compared to stocks, and some who think so are not particularly excited about it. There is broader consensus that goods or stock companies are worth having to broaden a portfolio and reduce risk.

“The stock market as a whole seems costly for us,” said Matt Kadnar, a specialist in the allocation of goods for GMOs, “but stocks of goods seem to be traded at a certain point of discount compared to where they have Historically negotiated and there is a diversification advantage. ”

“Having a certain element of your portfolio of commodity-based stocks makes sense,” he said, “but it’s much harder to call them a strong buyout than you might have been 15 months ago when they were brought to detergents.” Around the time the crude oil was shifting to low minimum, in the middle barrel, about half where it is now. Agricultural and precious metals and metals were also close to long-term funds.

Krishna Memani, investment manager at OppenheimerFunds, agrees that stock of raw material producers would have been better, but still believes that they are valid and are likely to exert well in the second half as evidence of a major recovery Global economy.

“Since goods are fashionable, commodity-oriented businesses are probably cheap, although I would say that with far more conviction in the first quarter of 2016,” said Memani. “As the synchronized image of global growth persists, the discount can disappear.”

One of the reasons why Mr Kadnar thinks that production companies’ shares have been recovered less than they ought to have is that there is a bias against them that actually creates long-term value.

“One of the things we like is that managers tend to avoid them,” he said.

Mr. Kadnar was suggesting a lack of investment in raw materials: for them there are no basic prices that are right. There are budget indicators as price-earning indicators to indicate whether stocks are reasonably valued, but goods generally move, often with violent oscillations, in response to ephemeral, often unforeseeable economic, industrial and even meteorological events.

Investors can work around these difficulties, said Scott E. Wolle, chief investment officer for global asset allocation to Invesco, comparing recent prices with their long-term averages (most of the goods are well traded Below their average prices over the past 10 years, he noted) and choosing exposure to a wide range of markets, seeking diversification within and within raw materials.

“This is a long-term measure of value that you should put on the right side of business,” he said.

Funds traded with a diversified range of physical goods include iShares S & P GSCI Commodity-Indexed Trust, the PowerShares DB Commodity Index and the Fund United Funds Commodity Index. The first two are heavily weighted against energy raw materials; The third has equal shares of 14 commodities.

E.T.F.s for the production company’s shares generally focus on narrower segments such as SPDR S & P Metals & Mining, FlexShares Morningstar Global Fund for Natural Resources Index and VanEck Vectors Agribusiness.

Raw materials are useful for hedging against inflation, Wolle said. He acknowledged that inflation has been subdued throughout the world for many years and that commodity prices have suffered, but remain “one of the few resources that can protect you from this.”

Some raw materials, particularly gold, also serve as hedges against political uncertainty and upheavals, Wolle said. There have certainly been some of these last months and gold has reached about 20% from its bottom towards the end of 2015.

With still world monetary policy, it recommends exposure to precious metals to protect itself from any kind of inflation. The immediate prospect is also desirable for industrial and energy metals, in its view, as economic growth comes out in several parts of the world, even if it recommends dismantling agricultural raw materials.

As to how to get exposure, Wolle favors the materials themselves, or funds that they own, rather than stockpiles. Some companies protect their exposure by using derivative contracts that block a specific price for what they produce, limiting the rising price advantage, he stressed.

Wells Fargo Investment Institute, on the other hand, favors an unprecedented approach when it comes to short-term allocations to commodities. It has been bearish since the beginning of the year and predicts weakness in 2018, in line with its rising dollar prospects, which tends to move in the opposite direction to raw materials.

But John LaForge, head of the real asset strategy of the institute, admitted in a recent report that “the US dollar could hurt us if it becomes unexpectedly overly weak.” Noting that gold, an alternative currency for thousands of years, is more sensitive to dollar movements than other goods, he added: “Gold is where we could really be wrong.”

Although the goods bounce, they can not bounce that high, warned Mr. Memani of OppenheimerFunds.

“Raw materials are probably in a good place compared to the dynamic demand / supply,” but that “does not mean that prices are coming back to the old highs” about six years ago.

“People have attributed a special value to raw materials based on the growth period from 2000 to 2007 driven by an investment and a boom in construction in emerging markets and in China in particular,” he said. “While demand accelerated significantly, it helped prices, but in turn brought new supplies and depressed prices. Unless you get a new boom, the likelihood of prices coming back to that level is small enough “.

It is clear that raw materials cost a lot less than a few years ago and that stocks cost a lot more. But given the variety of raw material reviews, it is less clear that they are the best of alternatives seeking value investors, although others are not that big. Investors should therefore pay attention when considering what, how and why to buy.

“With goods, like anything else, there are no easy answers,” said Mr. Kadnar.

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