Investments views for the month ahead



Commodity trader Glencore’s CEO, Ivan Glasenberg has discovered that trying to offload a mine in a buyers’ market is harder than shifting inventory for commission. He had been trying to build a better positioned and diversified portfolio with an oil and base metal hedge.

Most analysts predicted these would rise on the back of a Chinese recovery in 2015. Instead, the whole commodity market followed oil’s descent, taking mining asset prices with it. Last month’s monster fall in Glencore’s share price was driven by liquidity and solvency worries, not just by commodity prices.

So Glencore’s recent sell-off was self-inflicted and driven by complexity, overconfidence and bad communication.

There are only two certainties about commodities: they are very cyclical and they tend to be self-correcting. It is almost impossible to time the top and bottom of any market, so investors should focus on avoiding poor management teams and excessive leverage.

One thing to remember about leverage is that it can turn a good investment into a bad one, but it will not turn a bad investment into a good one. Even if the trader is right in the long run he faces ruin in the short run if he has too much debt.

When investing in commodity companies, one should not try to predict the price movement in the short to mid term. Pay attention to balance sheets and stick to companies with assets in politically stable countries to have a chance of surviving volatility.

We are still underweight commodities and see a volatile sideways range as the most likely scenario. Being cyclical, we expect commodities to make a firm comeback only when excess capacity disappears, and this means closures or a demand pickup.

Property’s rise is linked to general economic recovery and, like commodities, is a class fuelled heavily by debt. We hold both via listed equity. We still like a number of property stocks with low gearing, reasonable price to book ratios, and commercial strategies in areas of high demand.

We currently hold a retail infrastructure stock, one in construction and support services, two in logistics and one in housing. Gearing ranges between 60 and 18 per cent, and as a group price to book is 0.9 times. Yield ranges from 6.6 to 1.5 per cent and we see all as offering value at reasonable risk.

Giles Rowe is chief executive and chief investment officer at Henderson Rowe.

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