To The Moon

Every bear market is simultaneously the start of a new bull market. The winners in the new bull market are rarely the winners of the last bull market. These winners already start to stand out during the bear market. In this respect, the energy sector would be an obvious candidate. It is the only sector showing a clear plus this year. Moreover, it faces a chronic shortage of energy. First of all, for not investing enough in finding and exploring new fossil fuels. This is understandable in the climate crisis and the desired energy transition, but then we should also stop burning 100 million barrels of oil a day. Because there is an insufficient investment, oil prices will eventually rise. Incidentally, this may take as long as 7-10 years, because that is how much time there is between the decision to invest and eventual production. Meanwhile, stocks continue to fall.

Because the energy transition is actually a metal transition, metals will be in high demand in the coming years for upgrading the power grid, electric motors, batteries, etc. Metals have actually become an alternative to fossil fuels. Only at the moment, the vast majority of metals still go into construction-related investments, and the fact that both the US and Chinese housing markets are at a standstill gives pause. Besides energy and metals, commodities also comprise agricultural raw materials. Besides oil and metals, Russia and Ukraine are also major producers of agricultural commodities. Moreover, agricultural products largely consist of energy such as diesel for agricultural machinery and fertilisers. It is still striking how extremely low the companies that benefit from this are valued. In itself, it is explainable that they are unloved, given the trend in returns over the past decade. They are also hardly followed by analysts anymore and, as such, they are hardly represented in portfolios. As a result, they are thus typical value stocks, but with particularly good growth prospects. It is not for nothing that investors like Warren Buffett and GMO are buying these companies at this very moment. A nice bonus is that they are also inflation hedges. Now inflation is likely to fall in the coming months, but for the next decade, inflation is likely to remain high (in waves).

Everything, of course, revolves around energy. The fact that OPEC has a bigger market share today (with Russia) does not bode well. Every time OPEC's market share rose in the past, the price of oil also rose. Moreover, OPEC is struggling to maintain production levels. Of the cut of 2 million barrels a day announced last week, about 1 million had been realised immediately because several countries are delivering less than what was agreed. It also remains to be seen how the Russian oil industry will get through the cold winter. Probably the Russian winter requires a lot of new parts. Parts that were supplied by Western oil companies. These are now no longer willing or allowed to do business. Several fields are falling sharply in production. Sakhalin 1, for instance, is now producing only 10,000 barrels instead of 220,000 barrels a day. In that respect, Russia resembles Venezuela. That country once produced 4 million barrels a day, but after US oil companies were thrown out of the country, only half a million barrels a day eventually remained. If the same happens to Russia, there will be an acute shortage of oil in the short term. Oil (energy) is at the root of everything. Several companies producing metals are at a standstill in Europe because energy prices are too high. The cost price of metals like aluminium and zinc actually consists largely of energy. Similarly, the fact that the lights are going out in the West Country can only mean that food prices can rise further. Since food and energy are first necessities, these are ideal sectors for investors in that respect, and they are completely insensitive to interest rates at their current valuation. 

Due to relatively high commodity prices, several emerging countries are performing well. In countries like Brazil, Peru and Chile, the currency is even outperforming the dollar. Emerging countries should actually be split into three groups. There is a group that produces commodities and is therefore relatively immune to the liquidity crisis. There is a group that is no longer dependent on the dollar because they can pay commodity producers in their own currency. Think of countries like China, India and Indonesia. That leaves a group of countries that cannot use their own currency and do not have commodities. Those, unfortunately, are the losers. Think of countries like Sri Lanka, Bangladesh, Turkey and Pakistan. That seems fairly towards the frontier markets, but that is not correct. Frontier markets actually include Middle Eastern countries that do benefit. Furthermore, Vietnam is both rich in raw materials and also an excellent alternative to China for many producers.

Also, or perhaps especially, emerging countries that do not produce commodities and whose currency is also not accepted by the Russians, will benefit from a weakening dollar. The dollar is now so extremely expensive that a weakening is obvious over time (perhaps it will happen faster if the turn comes after the G20 in November). The wait is for US interest rates to spike, triggered by the Fed's monetary policy turn. Emerging countries are also low-rated and have the advantage of never having been able to participate in the monetary madness. That would be immediately punished by financial markets there. In that respect, the UK has looked more like an emerging market in recent weeks, with interest rate hikes additionally larger than in Turkey. Instead, many emerging countries have responded very disciplined to rising inflation, one of the reasons why they are little affected by the sharply rising dollar this year. The most important country in emerging markets is China and it is likely that after the 16 October congress there, all signs are green.