Rudi’s View: Investing In Megatrends (The Other Ones)

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 26 2023

In this week's Weekly Insights:

-Investing In Megatrends (The Other Ones)
-Research To Download
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

Investing In Megatrends (The Other Ones)

Investors who felt safe hiding in lithium stocks supported by broad-based belief in the global electrification theme have had a rude awakening over the past four months as the price of lithium has tanked by -50%-plus and share prices in the likes of Pilbara Minerals, Allkem and Liontown Resources are down by -25% or more.

This does not imply the global transition towards greener transport and electric power has been over-hyped. It does highlight that when it comes to industrial chemicals, metals and minerals, the short-term horizon is almost always determined by the balance between supply and demand - and history shows supply has a habit of catching up, eventually, as well as intermittently.

To put it bluntly: commodities seldom, if ever, move in a straight line. A similar observation today very much applies to producers of coal, the ultimate beez neez in 2022, while oil & gas producers are one of few sectors not posting a gain year-to-date. Uranium is widely believed to be part of the Megatrends story for the decade(s) ahead, but it's not apparent from share prices in Paladin Resources or Boss Energy.

Megatrends (Supercycles) or not, commodities move through cycles, with often violent price corrections, in both directions, along the way. The promise of a super-sized gain on the way up will always remain too attractive to resist, while the threat of a Wile E Coyote dive-off-the-cliff is never far off.

To illustrate the dilemma, I have included the thirty year price chart of shares in Alumina Ltd, one of the longest-listed commodity producers on the ASX.

It doesn't take much time to figure out there have been numerous occasions when the share price doubled, plus some, on the way up, only to give it all back, and some, on the way down.

Another, equally important, observation to make is that time does not by definition work in the patient shareholder's favour. While Alumina Ltd pays an annual dividend, its share price has effectively posted no sustainable gains since 2008, when shares tumbled from an all-time high above $6 to below $1. Today's circa $1.50 had never been recorded throughout the 1990s.

Sector mega-caps BHP Group ((BHP)) and Rio Tinto ((RIO)) did record new all-time highs in 2022, but their prior records dated from 2007, and we might well be past the summit in the current cycle for iron ore. As a side note: don't be confused by historical data on free websites including - all those data have been 'corrected' for dividend payouts, and thus show lower share prices for the past.

BHP shares peaked at $50 in late 2007, despite what is shown today on backward-looking historical price charts. (As per always, details matter, as does a great memory).

Alternative: The Forgotten Megatrends

Investing in Megatrends can be a completely different experience through larger sized industrial companies, on the condition that investors can get past the misguided belief that only shares trading on low PE ratios offer sustainable long-term gains, plus the underlying Megatrend needs to remain in place, of course.

Below is the historical chart for shares in property marketing portal REA Group ((REA)) which, on anybody's observation, shows a fundamentally different trajectory over time.

Admittedly, the global bond market reset has pulled down the share price valuation from its 2021 peak, but the shares have embarked on a solid uptrend in line with the market generally since October for a return of approximately 50% from last year's June low (25%-plus year-to-date).

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