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The Asset Class: George Cheavely · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
• 0:06
  Global asset classes have been affected in varying degrees of magnitude by the recent
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  announcement of an interim peace plan pertaining to the
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  war on Iran.
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  Commodities, of course, are no exception.
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  Oil, obviously, currently sharply lower since the announcement at around $80 a
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  barrel for Brent crude.
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  But what about the rest?
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  With me is George Cheveley, Portfolio manager at 91 in London.
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  Yes, oil is the obvious one, George.
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  It's still way higher than it was eight, nine months ago, but significantly lower
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  than the 120.
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  And that is important.
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  But it's really the other ones that I'm interested in, you know, the precious
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  metals, base metals, bulk commodities,
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  and also foodstuffs.
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  Where do you want to start?
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  Let's start with precious metals, because I think that's the, in some ways, you
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  know, a fairly simple story, I think,
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  going forward.
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  And actually...
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  We've just had the release of the World Gold Council's central bank survey, which
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  they do once a year.
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  And that's just come out and showing that even more central banks, you know, 45%
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  of the respondents said they expected to increase their gold holdings over the next
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  year,
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  which is slightly up from last year and continuing trend over the last few years.
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  So, you know, I think we've seen quite a bit about potential central bank sales,
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  etc.
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  But I think...
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  We continue to believe this is a structural long-term story, and this
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  survey certainly backs up that view.
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  If you took out all of the speculation, you know,
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  the proliferation of ETFs and the gold mania that gripped many retail investors,
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  I wonder if you took all that froth out.
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  I wonder where gold would have been without that, just with the central bank
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  buying, you know,
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  the really big long-term holders getting into the market.
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  Because the way I look at it is that gold has become a proxy for the dollar again.
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  It went down to around about $4,000.
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  And as soon as there was a whiff of a deal, the dollar went down and gold went
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  up to $300.
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  So I was just wondering where the equilibrium is.
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  I think, to be honest, we've been finding it because I think a lot of the
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  speculative froth has come out since the war began,
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  frankly.
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  And there was a lot of speculation about, you know, a dip in central bank buying and
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  even talk of some central bank selling.
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  The fact is, I mean, Q1 central bank buying was near a record level over 230
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  tons was bought in Q1,
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  which remember was at a very high price.
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  It's probably pared back a bit since then, but we continue to see pretty consistent
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  buying by the central banks.
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  And yeah, retail and speculation has been much, much quieter the last three months.
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  I think obviously, in recent weeks, we broke a very big technical level, the 200
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  day moving average.
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  which we've been above for three years we came below that and we're sitting just
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  below that today where it is resistant so
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  i i think we could see gold sort of you know sideways over the summer but quite
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  often what you see is late
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  august early september gold season it does well and
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  my expectation everything else being equal is that's what we'll see this year and i
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  still feel
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  quite comfortable in the fact that I believe gold will be trading higher than
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  this by the end of the year,
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  as people really focus again on the fiscal imbalances that many governments have,
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  frankly,
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  and also back on the dollar.
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  What about equities?
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  What about gold equities?
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  Have they behaved in step with the gold price itself?
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  Well, yes, but with more volatility.
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  I mean, it's been a hugely volatile year for gold equities.
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  We've seen them trade up as much as I think the index has been up over 30% by
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  end of February,
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  now probably flat year to date, roughly, or just slightly positive today.
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  But we've had a lot of volatility around that.
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  Obviously, equities have rallied.
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  I think clearly gold price, you know, bouncing has helped.
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  Also, though, you know,
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  hopes that lower oil prices lead to better margins and less chance of, you know,
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  diesel running out or...
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  costs going up too much.
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  So obviously seeing the equities rally very strongly this week based on the deal.
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  What about PGMs, Platinum Group Metals? They've been interesting, not quite as
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  interesting as gold,
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  but interesting in their own way and for different reasons,
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  whether it be platinum or palladium or rhodium or any of the others.
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  What's been the action there?
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  Yeah, I mean, they've obviously been weaker as well.
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  Obviously, they're linked to gold prices and with gold down, their investment
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  allure has come back as well.
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  But on the other hand, I think certainly people saw big deficits in this market.
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  But one has to remember their largest end uses is automotive catalysts.
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  And with the higher oil prices, we saw a surge in EV sales, particularly in places
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  like Europe.
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  And some people are worried that this is sort of...
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  brought forward that conversion to electric vehicles, which obviously don't
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  require platinum and palladium.
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  Even so, we think that's probably, you know, more perception than anything.
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  It was happening anyway, but we still see pretty big deficits in these markets over
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  the next couple of years.
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  So we would expect to see prices, which had got overbought beginning of the year,
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  but we expect to see them sort of move up.
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  and with it margins for those large PGM producers.
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  Last time we spoke, we were speaking about copper at all-time record highs.
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  It's been pretty volatile since then.
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  But on the other hand, it's not that far away from all-time record highs as we
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  pre-record this podcast, George.
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  Has your opinion changed on the red metal?
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  It's a funny one because in a way we still fundamentally see the market in
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  oversupply.
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  We've seen stocks grow by a million tons on exchanges over the past year or so,
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  which to me signifies oversupply.
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  But we still have record prices and people say, how can that be?
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  There's two major reasons driving copper.
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  One is, again, speculation that the US might bring in a tariff on copper itself.
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  meant to um give us a decision by the end of this month or sometime very soon.
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  And that tariff would be imposed from January next year.
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  And that's driven
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  US prices higher than the London prices and dragged more copper into the States.
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  So whilst we do have a surplus of copper, we would believe most of that is now
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  sitting in the US.
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  And allied to that is the continual talk about critical metals and stockpiles of
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  those critical
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  metals.
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  And certainly, you know, in a way we say, well, there might be a surplus in the
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  market.
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  But if governments, not just US, Chinese, even Europeans are talking about it,
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  are prepared to hold those and build up their stockpiles, then that's going to,
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  you know,
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  unless we have an enormous surplus, which doesn't look likely,
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  it looks likely that they're going to essentially buy any surplus that's around.
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  So it feels copper, even though you might traditionally say fundamentals don't look.
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  great.
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  It doesn't feel like prices are going to go down much further.
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  And I think that's what the market's buying.
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  It's saying we've got a pretty strong floor.
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  And potentially, if things, you know, really tighten up, then obviously we see
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  prices much higher.
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  Moving on to bulk commodities, if we can, and particularly coal, if you could start
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  with coal and finish with coal if you want to.
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  But it's part of the energy complex.
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  So obviously pushed and pulled by the international oil price.
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  Has coal come down with oil since the announcement?
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  Coal hasn't moved that much since the announcement.
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  Coal tends to trade sort of gas as well as global energy prices drive it.
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  But obviously, we've also had a major disruption in China with these, well, two
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  mine accidents now,
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  which have been terrible with multiple deaths and explosions.
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  And that has also contributed to some of the recent strength in coal prices,
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  as there's been a lot of mines closed for safety inspections in China.
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  So there's a number of factors at work here.
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  Coal actually hadn't really gone up so much since the start of the war.
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  And in a way, it's these supply disruptions have really started to move
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  it.
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  There's also talks of an El Nino,
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  which could lead to less rain in India.
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  That means less hydro and a higher coal burn.
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  And India is obviously a major coal consumer, also a major coal.
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  producer but but that could change things going forward so people still look at coal
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  even if energy gas
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  prices come back a bit are still looking fairly strong going forward from here
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  george
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  when you think of these straightforward moves you think of oil being disrupted
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  because it can't get out simple as that but another thing that can't get
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  out is fertilizer and there's been all sorts of horror stories and scaremongering
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  about famine because of fertilizer not being able to get out and get to the
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  farmers in key areas at key planting times.
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  What's the situation there?
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  It's quite a complicated situation in a sense because actually...
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  For northern hemisphere planting, quite a lot of farmers had already purchased their
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  fertilizer they buy at the beginning of the year.
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  So they already had fertilizer stocks when it came to planting.
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  Obviously, the war only really caused disruptions from March onwards.
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  The question is, obviously, when we get into planting season, southern hemisphere,
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  or various other regions,
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  whether we have enough fertilizer available.
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  And then the real key question, which applies to many commodities is fine,
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  even if the straits open by the end of this week and they get rid of the mines,
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  how quickly normal service is resumed is very uncertain.
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  And clearly, talking to a lot of ship owners and operators,
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  they're going to be very keen to get their ships out of the straits which have been
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  stuck there.
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  How keen they are to put them back in again for another journey is less certain.
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  And certainly what they will be doing is charging.
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  Well, they'll have to pay a lot more insurance and they'll be charging higher
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  rates as well.
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  So how the traffic in the straits actually, when we do resume, how much it
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  normalizes and how quickly is very,
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  very uncertain.
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  All we know is it won't be back to normal very quickly.
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  And therefore, I think the chances of disruptions through the next three,
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  six months are still quite high as a result.
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  So, you know, the market's treating the problem as solved.
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  clearly Things are better than they were without the deal, but it's difficult.
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  I think we're going to see some further disruptions, which are more unexpected, as
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  it takes a long time to normalise trade flows.
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  We're not here to talk about politics, but we have to hope and assume that the deal
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  will go ahead.
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  It'll be signed later this month in Switzerland, physically, that is.
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  It's already been signed digitally, if you like.
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  But we can assume that the world will go back to normal after three to six months,
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  as you just mentioned.
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  Therefore, how do you play the commodity complex?
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  Do you just say, OK, that was a horrible six to nine months we've just endured.
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  Let's go back to normal or have things changed materially?
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  No, I think, I mean, we've clearly destocked a lot of commodities over the
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  last three months or so.
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  So to say things just go back to normal is not true.
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  We're going to see a lot of people wanting to rebuild stocks,
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  both governments in terms of strategic oil stocks and companies in terms of their own
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  stocks.
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  And one would suspect a lot of those parties want to build stocks maybe
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  slightly higher than they had before,
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  because they didn't like that disruption.
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  They're like, actually, you know, that was a bit too close.
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  So obviously, this has changed people's views.
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  I mean, you know, the risk of the straight shutting was always there.
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  But it's very different now it's being shut.
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  And people are going to view that forever as a much riskier place.
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  And obviously, the other thing we're going to see is people building more pipelines
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  for the Middle East.
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  taking, you know, actions to make sure that they're never that exposed again.
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  So I think there's going to be a lot of consequences from it.
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  I think, frankly, on the other side is people will start to focus, I think, more
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  on economies and how they're doing.
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  And I think that's going to be very interesting.
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  The assumption is everything goes back to normal and economic growth is strong.
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  I think we have to wait and see because certainly there have been some of the
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  underlying data hasn't been so good.
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  And I think when the market starts focusing on some of that, I think we're
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  going to see definitely a divergence in performance around the
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  world.
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  Given all that, the obvious final question is how are you positioned at 91?
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  Or how are you seeing yourself being positioned over the next three to six
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  months and beyond?
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  So we frankly, in our resources funds, we remain overweight on the energy complex
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  because we think these disruptions will
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  continue for longer.
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  And essentially we think...
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  Oil prices are likely to average more likely $80 a barrel, where they're trading
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  today roughly,
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  as opposed to the $70 a barrel we would have assumed six months ago over the next
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  five years,
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  because of that de-stocking event that's happened.
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  On the other side, we remain slightly overweight precious and overweight
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  fertilizers, because we maintain that,
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  as I say, these disruptions could continue for some while.
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  And we see, you know, very strong margins from those companies.
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  George, thanks very much for your analysis.
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  George Cheveley is a portfolio manager at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors and do not reflect the policy,
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  position or opinion of any other agency, organisation,
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  employer or company associated with StrictlyBusinessPodcast.com.
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  Assumptions made on the analyses are not reflective.
• 14:07
  of the position of any other entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
• 14:16
  change,
• 14:17
  revision and rethinking at any time.
• 14:20
  Please do not hold us to them in perpetuity.