MYWEALTH INVESTMENTS: Summary of the Investment Club Meeting on 16 September 2021 – Part Two

TECHNICAL ANALYSIS:  THIRD QUARTER

MyWealth Investments aims to have a meeting every quarter.  In the previous Investments Club meeting, we spoke to Chris Gilmore.  The economy was seen as entering a super cycle, we saw some interesting trades and a lot happening in China, presenting opportunities for investors.

Commodities:

Platinum group metals (platinum, rhodium, palladium) has come down substantially in the past couple of weeks.  Automobile manufacturers have started to cut down substantially and these metals are used in cutting emissions in internal combustion engines.

Toyota has announced that they want to cut down about 300 000 vehicles in the Asian Pacific region.  The effect of this could be seen in the platinum price in the past week.

Today alone we saw losses in this industry of way below 5 %.  Most industrial metals are run by China.  Since China is industrialising at such a fast pace, whatever happens in China is going to affect local stocks.  Investors need to look at margin of safety, what the all-in sustaining cost is for these stocks.  The all-in sustaining costs is defined as how much it costs us to produce one ounce of platinum vs. where the platinum price is.  The margin of safety was at record highs, even higher than in 2008, when we saw another super cycle.

It gives some leeway to still make some profits now, but we cannot expect to see the record dividends which were declared by mining companies, be it platinum, gold or copper.  They declared earnings up above 200 – 300 % and from now on we can expect to see normalisation of earnings from these counters.

The low base effect is still playing out and, if compared to normalised earnings for 2019, we can see quite a different picture across the board.

Copper is back at record high levels and copper is always an indication of what is happening in the world economies.  The momentum in the construction sector is still picking up, aluminium is at a 3 year high, and the price of lithium is up 98 % for the year.  Sibanye Stillwater has just announced that they are partnering with an Australian mining company, and they are getting into the lithium market, which is considered extremely profitable.

Sibanye is a multinational precious metals mining company, with a diverse portfolio of platinum group metals in SA and the US, gold and base metals operations and various mining projects in SA and the Americas.

The Federal Reserve Bank (Fed) pointed out in the previous quarter that there will be bottlenecks and the supply chain disruptions might be with us for at least another 2 years.  We are witnessing the transitory increases in inflation across the globe right now, it is a hot topic all over the world.  It will be interesting to see how the Fed is going to deal with this issue, because the stimulus provided by the central banks, was fuelling the commodity prices, and fuelling inflation.  Now we are sitting with economic growth that is softening again, so how do you get the inflation under control?  Interest rates cannot just be hiked, especially in a country like SA.  It will be interesting to see the Fed’s next move because the road to recovery is uneven.  Everyone is watching the jobless numbers every week, paying close attention to non-farm payrolls.  In previous numbers, we’ve seen quite an increase in hourly earnings, which is inflationary.  The inflation problem is not going to go away.

We see an energy crunch in Europe right now, their gas stockpiles are low, it’s 1 month before the heating season, that is also going to push up inflation.

At this point, from an investor’s point of view, at these prices of stocks especially with exposure to China, this may be a great opportunity to start buying.

Global economy

In the mid 1980’s and coming into 2015 -2016, high inflation was seen locally and globally.  One thing we realised about the pandemic, because of supply size shocks and less demand, we’ve been able to contain the inflation that would ordinarily be caused by stimulus.  If you print money, there will be more money chasing too few goods.  The problem is that there are no goods being supplied.  The supply bottlenecks have created some normalisation in inflation because the inflation now coming onboard is in essence transitory and is because of low base effect.  We see cyclical inflation rather than structural inflation.  Economists believe that, because there is no pent-up demand, and we see irregular spending from consumers, we should expect to see the Fed’s to keep interest rates constant for some time.

Looking at the Fed’s balance sheet at the beginning of the pandemic, it was almost at 4 trillion USD.  It is now at 12 trillion USD.  In the space of a year and a half, with the bond buying stimulus packages, it has grown by almost 200 %.  The question is, how sustainable is that?

The GDP in SA in the previous year contracted by 6.4 %.  This year it is forecasted to grow by from 3 % to close to 5 %.

European Purchasing Managers Index (PMI) also is volatile, so the road to recovery is uneven.

In the global economy, we should closely monitor job reports and look at what the labour market looks like in the US.

Read also:

• MYWEALTH INVESTMENTS: Summary of the Investment Club Meeting on 16 September 2021 – Part One