Commodity stocks may have been seriously oversold. Buy at, or near, the bottom.

As most commodity prices have continued to plunge, and commodity stocks have fallen even faster, could we be nearing, or at, the bottom? If so there are bargains to be had out there.

Author: Lawrence Williams
Posted:  Tuesday , 14 Oct 2008


The market has moved beyond logic to serious panic as evidenced by not only the enormous declines in commodity stocks, but in stocks in general. Blue chips have fallen alongside those with less illustrious antecedents. Only gold seems to be bucking this trend and here price movements have been volatile - up $50 one moment, down $50 the next.

This is symptomatic of uncontrolled selling off of virtually any assets to meet liquidity needs, aided and abetted by computerised stop loss selling which in turn leads to a lowering of prices triggering further sales. Sometimes it seems world markets are descending into some kind of bottomless pit. Meanwhile bankers and the press, and some who should know better, have been talking the world into a global recession.

For commodities, there is little doubt that the euphoria of only a year or so ago with talk of a supercycle driven in particular by the huge growth in countries like China and India, has been well and truly replaced with a gloom and doom scenario as the Western World slowly but surely moves towards recession. This could easily become a depression on the scale of that of the U.S. depression of 1929, with drastic job losses and bankers leaping from high buildings as fortunes are lost, although nowadays the stigma of bankruptcy is probably no longer sufficiently demoralising to cause much in the way of mortal self destruction.

But, and this is a big but, the latest projections still have China growing at over 9 percent - admittedly down from the 11-12percent seen in the past, but the kind of growth rate that any Western country would give its eye teeth for. India too is seeing rapid population growth. (Some estimates would put India as the world's most populous nation within ten years.) And the aspirations of the people of these countries, which are developing rapidly, will likely continue to support massive domestic growth, regardless of what is happening in the Western World, as more and more of their industrial output is necessary to feed internal consumption rather than be turned into cheap goods for the West.

Whether the latest moves by European governments to try and stabilise the global financial collapse will work it is too early to say. Other initiatives have seen brief upturns in the stock markets only for them to crash even further a couple of days later, but if markets do stabilise there is likely to be a fairly rapid rerating of the better stocks with good prospects of outperforming through the financial quagmire that still lies ahead. Market indicators will be watched closely as the current turmoil has tended to cloud judgements of even the most sophisticated analysts.

Key to watch will be whether China really is continuing to grow at just under 10 percent. If it is, then selected resource stocks have to be strong buys at current levels, with the current setback turning out to be effectively a huge correction in an ongoing bull commodities market. If Chinese growth falters severely, then we could still be in for a rough ride.

Markets may have bottomed, but although it is great to call the bottom, and invest accordingly, there are still substantial risks. Markets have not yet fallen as much as in 1929 which is a sobering thought.

For those putting safety first, maybe it is better to hold off for the moment and wait a little longer. Buying anywhere on an upswing may not be as profitable as buying at the absolute bottom, but it can still be very profitable.

Regarding commodity prices, the falls seen over the past few months have brought many metals prices down close to the marginal cost of production where further falls will lead to mine and smelter closures, sometimes never to re-open. This should underpin prices.  We are already seeing this in some sectors of the market. If this leads to supply shortages, then prices will rise inevitably, thus cushioning the downside risk of going back into the mining sector. But again if you do this it would be wise to be sure that those companies you invest in are in the lowest production cost quartile so that closures through declining prices are not likely. There's plenty of scope for bargain buying out there right now without horrendous downside risks.

Some commodity stocks have certainly been oversold even on the most pessimistic demand projections. Do your research and reap the longer term benefits although there could still be a rough short term ride ahead.


Jean-Louis Kayitenkore
Procurement Consultant
Gsm:  +250-08470205
Home: +250-55104140
P.O. Box 3867
East Africa
Blog: http://www.cepgl.blogspot.com
Skype ID : Kayisa66

No comments:

Post a Comment