How investors can take advantage of the ‘commodities super cycle’
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The ‘commodities super cycle’ and the bullish outlook for tech both have further to run, pro investor Heath Moss says.
Moss, the founder and operator of HLM Investments, highlighted those themes in a research note for clients earlier this week.
And speaking with Stockhead, he provided further details around the macro outlook and which ASX small caps are on his radar heading into 2021.
Following last month’s positive vaccine news, a global flow of money moved back into stocks such as banks, listed REITs (real estate investment trusts) and travel companies.
It marked a shift into cyclical ‘value’ stocks which have been well beaten by high-growth tech names in recent years.
But amid the broader market gains, Moss doesn’t expect the move to become entrenched.
He said the shift “was more that the value play had been beaten down so much. It really hadn’t had a recovery like the rest of the market had”.
And with an index weighted to the major banks, “Australia is still very much a ‘value’ style market”.
“In the longer term, the premise of value is that it relies on rising yields,” Moss told Stockhead.
“We’ve seen longer-dated 10-year bond yields rising quite aggressively, but I don’t think markets are really taking much notice of that at the moment.”
For now, the RBA is still capping the yields on shorter term three-year bonds via its yield curve control program.
Last week, RBA governor Phillip Lowe said the bank wasn’t expecting to increase benchmark interest rates for “at least three years”.
“I’m not sure if they’re going to be able to do that. But for the next 12 months to two years I don’t think it will change.”
The net result is “low rates and cheap debt”, Moss says.
“That’s what tech stocks love, that’s what healthcare loves. All high-growth stocks rely on cheap debt to help drive their return on equity.”
“So I still think that’s the play, and I think picking up growth stocks that have come off recently is a decent way to go about it.”
As part of his research this week, Moss also paid attention to the macro factors underpinning the impressive bull run for a range of commodity assets.
Iron ore prices are closing in on eight-year highs (more on the reasons why here).
Shares in CIA are up by ~80pc since September, but despite those gains Moss said the stock is still only trading on a multiple of 4x expected 2022 earnings.
He added that investors shouldn’t forget about iron ore royalties company Deterra Royalties Ltd (ASX:DRR), which will benefit from increased production and higher prices.
Aussie producers can still make strong margins if prices revert to $US100/t, Moss said, but the prevailing sentiment shift may weigh on prices.
In that context, leading indicators on Chinese steel demand could provide important clues on the outlook.
“Enjoy the ride and be prepared to take some off the table if indicators turn,” Moss said.
Elsewhere in the commodities ‘super cycle’, Moss also put the spotlight on gold – a 2020 “poster child” given its status as a store of value amid an environment of rock-bottom interest rates and huge policy stimulus.
For investors looking to add simple gold exposure, Moss likes the BetaShares Gold Bullion ETF (ASX:QAU) because it’s currency-hedged, which will protect returns if the Aussie dollar continues to rise.
While Moss focuses on managing a diversified portfolio for his clients, he also flagged a number of small-cap opportunities in line with the sector themes outlined above.
Speaking with Stockhead, he’s broadly bullish on the outlook for copper, but says “patience is required” at the small end of town where the “speccies (speculative stocks) haven’t done much yet”.
Moss is also bullish on the outlook for domestic construction, amid strong growth in the housing market and plenty of infrastructure projects in the pipeline.
“I think there’ll be a large construction boom in Australia. A lot of leading indicators — building approvals and loan approvals — are all pointing towards a very strong backdrop there,” he said.
In that context, “small-cap industrials I think could have a great next couple of years.”
“Acrow Formwork & Construction (ASX:ACF) is probably my favourite high-risk play, and Laserbond (ASX:LBL), AML3D (ASX:AL3) and GR Engineering Services (ASX:GNG) all look great to me at current prices.”