Finding Value In Declining Commodity Prices

I’m going to begin with a bit of good news. Below is our China Region Fund. As you can see, not only has it broken above its 50- and 200-day moving averages, but it’s also trading at four-year highs. And since this chart was created early last week, the fund has climbed even higher, to $9.53 as of this writing.

Of the 29 resources featured in the chart above, only red meat is in the black.

Whereas many of these commodities are facing oversupply issues, the cattle industry as well as barbeque purveyors are currently struggling with a brisket shortage, which have driven the wholesale price of the popular cut of meat up 60 percent from last year. Several barbeque joints here in San Antonio, in fact, have fallen victim this year to what the media are calling “the brisket bandit,” who’s made off with thousands of dollars’ worth of meat, both raw and smoked.

Platinum and palladium are fundamentally undervalued right now, and demand for both metals is expected to pick up this year. Low prices should spur platinum jewelry demand in China, while an increase in automobile sales in the U.S., eurozone and China should help palladium. (Palladium is used in the production of catalytic converters.)

The challenging crude oil environment has prompted the first of what will likely be a new wave of oil and gas company mergers and acquisitions (M&As) similar to what we last saw in the late 1990s. If you recall, Exxon merged with Mobil (NYSE:XOM) in an $80-billion deal, BP (NYSE:BP) tied the knot with Amoco and Chevron (NYSE:CVX) bought Texaco.

The current cycle kicked off last November when titan Halliburton (NYSE:HAL) agreed to purchase Baker Hughes (NYSE:BHI) for $35 billion. Now, for double that price in cash and stock, Royal Dutch Shell (LONDON:RDSa) Royal Dutch Shell A (NYSE:RDSa) plans to gobble up UK-based BG Group (LONDON:BG) in the biggest deal since the Exxon-Mobil merger. The combined companies will become the world’s largest producer of liquefied natural gas (LNG). Shell’s oil and gas reserves will grow 25 percent and give the company huge exposure to proven oilfields in Australia and Brazil. As is normally the case, the company being acquired sees a spike in share price, and BG is no exception; this week alone, its stock has risen more than 30 percent.

It’s doubtful we’ll see a deal this round as massive as Exxon-Mobil, but we expect more to occur among the junior to mid-tier producers and explorers.

Disclosure: Please consider carefully a fund’s investment objectives, risks, charges and expenses.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The Shanghai Composite Index (SSE (LONDON:SSE)) is an index of all stocks that trade on the Shanghai Stock Exchange.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2015: American Airlines 0.00%, Baker Hughes 0.00%, BG Group 0.00%, BP PLC 0.00%, Canaccord Genuity Group Inc. 0.00%, Chevron Corp. (NYSE:CVX) 0.00%, Exxon Mobil Corp (NYSE:XOM). 0.00%, Halliburton 0.00%, IHS Inc. 0.00%, Morgan Stanley (NYSE:MS) China A Share Fund 0.00%, Royal Dutch Shell PLC 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Written By: Frank Holmes