Apparently, everyone is now jumping on the commodity bandwagon – or so it “appears”. The number of emails and reports pumping up commodities has skyrocketed this year. However, when I look at ETF flows I continue to see more of the same – investors piling into equity ETFs and commodity ETFs nowhere to be found. I’m not too surprised. Most pundits like to talk but rarely back up their words or position their portfolios accordingly. Talk is cheap as they say.
It’s really a head scratcher to be buying US equities at these valuation levels especially when they are up 380% since 2009. I guess those investors simply like buying high. If you have been long US equities, then I get it. But your incremental dollar should be going into cheaper equity markets (EM, Japan, Europe, Value stocks, etc), commodities (energy, metals, aggs), or liquid alternatives. At least that’s been Astoria’s approach.
We began investing in commodities and commodity equities last year. We thought in a world where US stock and bond valuations were rich, commodities offered better risk adjusted returns. In fact, when we published our 2018 outlook on December 6, 2017 (https://www.astoriaadvisors.com/single-post/2017/12/06/8-ETFs-for-2018) commodities was our 2nd most important theme.
I was fortunate to participate in Bloomberg’s Top ETF Trade Ideas Panel in December 2017 and I mentioned commodities on the panel and afterwards. People looked at me like I had 3 heads. In general, Astoria’s investment approach is forward looking whereas most portfolios are backward looking.
The current environment for commodities feels very much like 2007. It was pretty clear back then that economy was in the latter stages of the economic cycle. As it is always the case, we never know when the cycle is going to end. Because economic cycles are difficult to time, commodities typically outperform well during the latter stages of the economic cycle. 2007 was no different. Front month crude oil futures went up 130% in 2007 just when the economy was about to crash.
To be clear, we are not saying the economy is going to crash or that oil will double. We are simply drawing a comparison that 1) commodities are late cycle plays 2) they can perform violently on the way up and down. For those that don’t remember, oil fell 70% in 2008. Ouch!
We will be putting out an in-depth research report on commodities soon. Stay tuned.
Best, John Davi
Founder & CIO of Astoria
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