by Robert Hsu | March 4, 2011 12:01 am
Three years ago, when inflation turned a religious protest into a violent riot in Tibet, I wrote about the likely increase of such riots in poorer parts of the world. This week, global stock markets were roiled by spreading political unrest in the Middle East, particularly in oil-rich Libya, where the desert nation’s military dictator Moammar Gadhafi engages in civil war to hang on to power.
What started out as food inflation protests against the self-immolation of a vegetable vendor in Tunisia became a socio-political revolution that spread like wildfire throughout the Middle East. Within weeks of the event, regimes in Tunisia and Egypt were quickly toppled, while regimes in neighboring countries such as Jordan, Libya and Algeria struggled to remain in control.
And even before the current situation in Libya hit headlines, the equally-weighted CRB Commodity Index was regularly making all-time highs. The CRB index is important as all constituents have equal weights and show the breadth of the rally in commodities — since last June, the index has climbed more than 50%. And I expect the trend of higher oil prices will continue, especially with the tensions in the Middle East intensifying.
It is mind-boggling when you consider this revolution was caused by global food inflation — a serious issue affecting emerging markets. While we have low reported inflation here in the United States because of the real estate-related components in the CPI, we’re seeing big inflationary issues in emerging markets. So it pays to look for global investments that benefit from rising inflation around the world and serve as inflation hedges.
This week, we watched as gold hit all-time nominal highs. At its current price, right around $1,400, it looks expensive, but since we are talking about inflation, you would be surprised to know that the inflation-adjusted all-time high from 1980 is close to $2,500 per ounce.
In addition, so far the gold price advance has been rather orderly. Breakout moves have been followed by corrections and periods of consolidation, and as I’ve consistently said, dips in gold are buying opportunities, and I’m expecting to see gold hit $1,600 this year.
I like the SPDR Gold Trust (NYSE: GLD) as a way to play this trend, and we’re up significantly — about 150% — since I recommended the fund as an important part of our China Strategy portfolio back in 2006.
In addition, there are several new exchange-traded funds (ETFs) launched that allow inspections — like the ETFS Gold Trust (NYSE: SGOL) — as well as those that let you redeem your shares in gold, like the Sprott Physical Gold Trust (NYSE: PHYS). A caveat though, the Sprott product tends to trade at a premium to the physical metal. Right now that premium is about 5%, so it is manageable, but right after the introduction of the trust it went over 20%, which was too high. The other caveat is that if you want your shares redeemed in gold, you have to have a position that is over $500,000.
For most investors, GLD represents the easiest and most liquid way to get exposure to this story, and I think that we’ve still got room for this precious metal to run considering the continued global tensions.
Oil stocks are flying with crude above $100, so the correction in China National Offshore Oil Corporation (NYSE: CEO) that we saw in the first two months of 2011 looks like a good buying opportunity here.
As you well know, China has had an insatiable demand for oil, and it has already become the world’s largest consumer of energy. CNOOC is a state-owned enterprise, but one that is run in an efficient manner and supported by the government internationally due to the strategic nature of its business.
The company has been buying up assets globally, with $150 billion earmarked in the next five years to increase production volumes; the goal is to have additional 50 million tons of oil and gas from overseas fields by 2020. The shares are not terribly expensive at 10.5 2011 earnings estimates, which may be too low considering the current price levels of oil. The shares also have a dividend yield of 2.1%, but because the payout ratio is only 48%, that may be increased.
In addition, CNOOC is my pick for InvestorPlace’s Top 10 Stocks for 2011. The stock represents a safe, long-term way to play inflation, higher oil prices and the Chinese Miracle, and despite the rough start for the year because of its outperformance late last year, I think that come December, the share price will be sitting nicely above current levels.
The recent unrest in North Africa began as food riots, and the only way to increase crop yields in order to bring down prices is via better seeds and fertilizer.
That brings us to Agrium (NYSE: AGU), one of the most diversified ways to play a continued recovery in agricultural demand. The company produces fertilizer nutrients with an emphasis on nitrogen and smaller, regional positions within potash and phosphates.
In addition, the U.S. Department of Agriculture recently reported corn planting intentions of 88.8 million acres — a 3% increase over last year’s 86.5 million acres. This represents the second-highest year for corn planting in more than 50 years, so strong industry sales of fertilizer can be expected.
Overall, long-term secular trends in the agriculture industry are good reasons to consider owning Agrium. Not to mention that Chinese agriculture companies tend to benefit when food prices rise — as long as those prices don’t rise too much to receive the attention of the Chinese government in the form of price controls, or too quickly to take a serious bite out of consumer demand — and I expect we should see continued upside in many of the biggest stocks in China’s agriculture space.
Currently, AGU trades at 12 times forward 2011 earnings — much lower than the majority of its competitors. I view this global investment as a bargain in the fertilizer space.
In general, small-cap stocks do better in inflationary times than large-cap stocks. The most leveraged small-cap sector to such a trend would be Russian small caps, due to the highest leverage of the Russian economy to energy and metals prices. But for now, we don’t have easy access to many Russian small-caps, and there are no Russian small-cap-only ETFs yet.
However, we do have a small-cap ETF from the next-most-leveraged market to natural resources — Brazil.
The Market Vectors Brazil Small Cap ETF (NYSE: BRF) had a great 2010, and it presents a compelling entry point at current levels after the recent correction for new investors in 2011. One to two sharp corrections per year is entirely normal in an ongoing bull market, and barring any dramatic escalation on the geopolitical front, we may be ready for an extended trend higher.
There are no ADRs for the small-cap Brazilian stocks represented, so this ETF is a great global investment to gain exposure to the “real” Brazil.
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