Here’s which commodities offer the most potential for growth and how to invest in them.
Transcript:
CONWAY GITTENS: So given your outlook and from what you’re hearing, the screaming that you’re hearing from the commodity market, where should investors put their money to work in the commodity space?
MALEEHA BENGALI: So based on our view, we actually have a very sanguine view about what commodities will do because the Fed is going to cut rates. I think the housing market. U.S. consumers are strapped when the Fed lowers rates by whether it’s 50 or 100 basis points, the dollar is going to fall eventually and then commodity will get a bit of a boost. But not all commodities are going to go up. So now where do you invest. We like copper because I think copper has the tightest demand supply fundamentals where demand is weak from Chinese property bubble, but there’s a lot of strength coming from the EV market power global data centers, the electrification that we talk about and supply is quite tight. So we like prices here. Because you get a bit of a snapback in demand in China and boom copper can rally really hard. So copper we like a lot. You just got to get on the right time.
Oil we’re not a big fan of forgetting the fact that we are talking about geopolitical headlines right now and assuming no infrastructure is taken out, there is no shortage of oil. And that’s been my mantra for all of this year. In fact, I write in all my notes, so there’s pockets of value. Then you have iron ore, you have steel, you have, aluminum. So we sort of break each market down by demand supply factors. And only the ones that on a very conservative demand estimates have a tight market like supply demand balance. Those are the ones you buy and not buy all. So going back to the consumer, going back to the investor, how do you know what to do. Because it’s so confusing. But that’s what our fund does, at least that’s what we try to do.
CONWAY GITTENS: And so what is the best way to go about investing in commodities. Are you a fan of the ETF route in the 60/40 model. What should our portfolios look like?
MALEEHA BENGALI: That’s a great question. So markets love doing the 60/40 because bonds and equities, it’s worked really well in the last few years, 10 years. So if we have inflation coming back with a vengeance, which it will at some point because the Fed’s going to cut rates, you need to allocate a percentage, maybe 10% or 20% to commodities. Today, we are at a five year underweight of commodities, so nobody knows what to do. Nobody wants to look at it. But in the last two weeks, people are now sort of like saying, how do we invest. Going back to your investment vehicles, ETFs have been the only way to invest, but ETFs have a massive negative carry. This is what we’ve been saying. Like many years ago, we had this chart on one of our presentations. Night gas is up 100% but the ETF is down 20% because of the negative role index.
So this is why commodity markets are very complex because based on the cost of carry every month, you could be losing 1.5% every month even though the commodity is going up. So ETFs are not the best way of doing it. Unless you know what you’re doing. You have to get the timing exactly right. And part of our fund does that right. We look at the physical markets. If we think the contango is in our favor, we’ll go shorter or the backwardation. So we try to leverage that alpha for our investors. And play that. But if you just like a retail investor and just buy and hold, you won’t always make money. So ETFs are probably not the best way to really make money in commodities. You have to trade the actual futures.
The actual companies like we are analyze the back end, the front end, the spreads, and based on the physical arbitrage, we’ll take positions actively to get that benefit for our investors or the equities and equities are very interesting because you can have an equity company like a gold mining stock that basically sees gold rally 30% but they don’t make money because they have really high costs. So if you get the equity wrong, you would still lose out. So it’s very, very complicated.
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