Commodity sector is the best performing theme and must own sector
Our Commodity Sector basket is especially interesting this year being the best performing basket up 3.4%. Given the bloodbath in growth stocks having had exposure to commodities would have shielded some of the impact from the Fed’s December pivot on interest rates and inflation. Our view is that most retail investors have a too high exposure to growth stocks but instead of panicking and selling their stocks they should instead balance their portfolios across components that can do well during inflation.
The table below shows the constituents in our Commodity Sector basket which covers companies across agriculture, chemicals, energy and mining. There are also plenty of ETFs covering commodity futures, the energy sector, agriculture sector and mining companies.
Deere & Co | Agriculture | Machinery | 114,723 | 23.9 | 44.4 | 8.4 | 274.8 |
Corteva Inc | Agriculture | Seeds and crops protection | 33,600 | 9.9 | 83.6 | 17.4 | NA |
Archer-Daniels-Midland Co | Agriculture | Integrated agribusiness | 40,431 | 32.5 | 28.5 | 0.4 | 88.9 |
Nutrien Ltd | Agriculture | Agricultural chemicals | 39,853 | 20.8 | 112.0 | 17.1 | NA |
Kubota Corp | Agriculture | Machinery | 24,908 | 17.7 | 41.2 | 14.9 | 42.1 |
Bunge Ltd | Agriculture | Integrated agribusiness | 13,531 | 39.2 | 80.4 | 5.9 | 64.2 |
WH Group Ltd | Agriculture | Meat processing | 8,382 | 3.9 | -1.9 | 59.8 | 2.1 |
Wilmar International Ltd | Agriculture | Integrated agribusiness | 19,691 | 27.4 | 13.6 | 39.4 | 26.0 |
Muyuan Foods Co Ltd | Agriculture | Pigs and feed products | 43,894 | 54.0 | NA | 35.6 | 909.5 |
Inner Mongolia Yili Industrial Group Co Ltd | Agriculture | Dairy products | 38,310 | 13.4 | NA | 34.4 | 135.8 |
Ingredion Inc | Agriculture | Sweeteners and starches | 6,265 | 13.3 | -23.8 | 17.5 | -16.3 |
Linde PLC | Chemicals | Industrial gas | 157,202 | 10.0 | 22.5 | 18.6 | 182.6 |
Air Liquide SA | Chemicals | Industrial and health care gases | 81,048 | -0.9 | 3.2 | 12.9 | 102.5 |
BASF SE | Chemicals | Diversified chemicals | 69,889 | 29.0 | 64.4 | 16.8 | -6.1 |
Air Products and Chemicals Inc | Chemicals | Industrial gas | 61,276 | 16.6 | 2.9 | 20.7 | 118.8 |
DuPont de Nemours Inc | Chemicals | Diversified chemicals | 39,759 | 2.2 | 819.5 | 25.5 | -2.0 |
Wanhua Chemical Group Co Ltd | Chemicals | Diversified chemicals | 45,373 | 91.3 | NA | 63.5 | 424.9 |
Chevron Corp | Energy | Integrated oil & gas | 255,785 | 29.2 | 66.7 | 3.0 | 45.7 |
Exxon Mobil Corp | Energy | Integrated oil & gas | 314,004 | 23.1 | 65.8 | 1.3 | 12.7 |
Shell PLC | Energy | Integrated oil & gas | 198,087 | -0.2 | 6.3 | 13.3 | 16.3 |
TotalEnergies SE | Energy | Integrated oil & gas | 153,530 | 23.7 | 53.7 | 3.9 | 49.4 |
PetroChina Co Ltd | Energy | Integrated oil & gas | 143,886 | 12.2 | NA | 19.8 | -19.5 |
Enbridge Inc | Energy | Transportation | 83,675 | 7.7 | 5.0 | 6.8 | 26.4 |
Neste Oyj | Energy | Refining and marketing | 31,728 | 3.4 | -16.0 | 51.5 | 285.6 |
ConocoPhillips | Energy | Exploration and production | 114,828 | 72.4 | 122.1 | 9.7 | 101.8 |
Phillips 66 | Energy | Refining and marketing | 37,266 | 24.0 | 52.2 | 13.9 | 24.9 |
Schlumberger NV | Energy | Oilfield services and equipment | 55,855 | -2.8 | NA | 7.1 | -44.3 |
Koninklijke Vopak NV | Energy | Tank terminal operator | 4,251 | 0.3 | -36.3 | 40.9 | -20.0 |
BHP Group PLC | Metals and mining | Iron ore and copper | 163,748 | 41.7 | 66.1 | -5.1 | 142.3 |
Rio Tinto PLC | Metals and mining | Iron ore and aluminium | 121,481 | 39.5 | 100.4 | -3.6 | 135.8 |
Vale SA | Metals and mining | Iron ore | 79,707 | 77.2 | 160.4 | 12.0 | 95.6 |
Southern Copper Corp | Metals and mining | Copper | 49,949 | 39.7 | 82.4 | -8.0 | 103.2 |
Newmont Corp | Metals and mining | Gold | 49,194 | 10.2 | -3.4 | 5.6 | 101.9 |
MMC Norilsk Nickel PJSC | Metals and mining | Palladium, nickel and copper | 44,422 | 27.1 | 85.7 | 20.0 | 187.4 |
Anglo American PLC | Metals and mining | Platinum, Copper and iron ore | 56,282 | 59.0 | 143.8 | -3.1 | 221.0 |
Glencore PLC | Metals and mining | Energy and metals | 71,259 | -7.5 | 28.1 | 7.8 | 43.9 |
ArcelorMittal SA | Metals and mining | Steel | 27,940 | 28.1 | 940.4 | 49.1 | 19.9 |
POSCO | Metals and mining | Steel | 18,648 | 32.2 | 102.1 | 69.4 | 11.2 |
MP Materials Corp | Metals and mining | Rare earth minerals | 6,932 | NA | NA | 26.7 | NA |
Lynas Rare Earths Ltd | Metals and mining | Rare earth minerals | 5,745 | 60.3 | 306.9 | 11.0 | 947.6 |
Source: Bloomberg and Saxo Group
* Diff to PT (%) is the difference between the price target and the current price in %
In our recently published Quarterly Outlook Q1 2022 we highlight the global energy sector as a sector with a strong expected return. The global energy sector has a shareholder yield (dividends + buybacks) of 5% and with an annualized growth rate of 5.1% in dividends and buybacks the sector has an expected return of around 10%, which is quite attractive in an inflationary environment because higher inflation will lift the price of energy and thus preserve purchasing power of capital.
Financial trading firms and market makers as hedging
Another interesting theme during rising interest rates and inflation are financial trading firms. These companies benefit from higher interest rates which in turn creates more market volatility which they also benefit from. In our view, financial trading firms will add great diversification to equity portfolio during inflationary pressures. The list below shows the constituents in our Financial Trading theme basket.
Morgan Stanley | Institutional brokerage | 177,501 | 16.1 | 25.8 | 14.3 | 158.2 |
Charles Schwab Corp/The | Multi brokerage | 170,173 | 56.9 | 32.3 | 13.3 | 126.2 |
Goldman Sachs Group Inc/The | Institutional brokerage | 119,730 | 21.5 | 88.3 | 30.0 | 57.9 |
S&P Global Inc | Financial information | 95,807 | 10.5 | 16.4 | 26.2 | 245.5 |
Hong Kong Exchanges & Clearing Ltd | Exchange & clearing | 74,106 | 23.5 | 22.5 | 15.1 | 171.5 |
CME Group Inc | Exchange & clearing | 79,115 | -5.7 | -6.0 | 6.9 | 114.8 |
Intercontinental Exchange Inc | Exchange & clearing | 68,820 | 23.2 | 9.3 | 27.1 | 124.5 |
Coinbase Global Inc | Exchange (crypto) | 38,444 | 649.5 | NA | 95.3 | NA |
London Stock Exchange Group PLC | Exchange & clearing | 52,192 | 105.7 | 16.1 | 30.1 | 138.7 |
CITIC Securities Co Ltd | Institutional brokerage | 53,165 | 26.0 | 36.4 | 18.0 | 52.3 |
MSCI Inc | Financial information | 40,575 | 20.5 | 27.0 | 38.1 | 525.8 |
Deutsche Boerse AG | Exchange & clearing | 33,138 | 4.4 | 7.2 | 9.8 | 117.2 |
Interactive Brokers Group Inc | Multi brokerage | 27,993 | 18.5 | 36.8 | 50.0 | 84.6 |
Nasdaq Inc | Exchange & clearing | 28,344 | 17.8 | 11.1 | 23.7 | 170.6 |
MarketAxess Holdings Inc (*) | Electronic bond platform | 12,650 | 1.4 | -14.3 | 15.2 | 91.3 |
Tradeweb Markets Inc | Electronic bond platform | 19,103 | 20.5 | 38.4 | 24.1 | NA |
Raymond James Financial Inc | Institutional brokerage | 20,440 | 25.1 | 96.8 | 28.8 | 109.3 |
Japan Exchange Group Inc | Exchange & clearing | 10,576 | 2.3 | 1.5 | 16.1 | 66.9 |
LPL Financial Holdings Inc | Institutional brokerage | 13,050 | 25.6 | 7.1 | 29.2 | 346.0 |
Cboe Global Markets Inc | Exchange & clearing | 12,248 | 13.5 | 6.6 | 21.0 | 57.6 |
Euronext NV | Exchange & clearing | 9,970 | 38.5 | 16.2 | 29.7 | 141.6 |
Virtu Financial Inc | Market-making | 5,329 | -6.2 | -36.4 | 9.5 | 104.6 |
Avanza Bank Holding AB | Retail brokerage | 4,735 | 40.2 | 48.7 | 28.2 | 301.7 |
Nordnet AB publ | Retail brokerage | 3,823 | 48.5 | 38.5 | 50.5 | NA |
IG Group Holdings PLC | Retail brokerage | 4,994 | 10.9 | 12.0 | 21.7 | 115.3 |
flatexDEGIRO AG | Retail brokerage | 2,148 | 131.7 | 61.6 | 90.8 | 406.2 |
Swissquote Group Holding SA | Retail brokerage | 2,489 | 47.6 | 115.6 | 48.8 | 569.6 |
Monex Group Inc | Retail brokerage | 1,289 | 75.3 | 445.4 | 58.8 | 98.2 |
CMC Markets PLC | Retail brokerage | 928 | -17.1 | -44.3 | 43.5 | 173.1 |
Flow Traders | Market-making | 1,771 | -46.0 | -54.6 | 1.7 | 52.4 |
Source: Bloomberg and Saxo Group
* Peter Garnry has holdings in the following companies
Finally, we believe investors should consider adding market makers to their portfolio as insurance components against tail-risk losses (big declines) in the portfolio. There are essentially two publicly listed market makers in the world (Flow Traders and Virtu Financial), and we wrote two notes (here and here) last year about their hedging capabilities during equity selloffs. This year they have proven that the idea is not a bad one.