Is copper the key to investment success in 2021?

It has been a good month for financial markets with increasing optimism about the strength of the economic recovery. The success of vaccines in reducing the number and severity of new cases in the UK meant that investors could realistically look to the end of restrictions on movement and socialising. Massive government and central bank monetary and fiscal interventions have ensured recovery will be swift. Government debt is at its highest since World War II. Sadly, much of the wartime spending ended up at the bottom of the Atlantic and Germany's fields. This time it has ended up in peoples' bank accounts. The Bank of England has increased its forecast for economic growth in 2021, and other economists are falling over themselves to do likewise. Goldman Sachs currently heads the list, forecasting 7.8 per cent growth this year. 

Commodities is leading the way, with coffee up 14.5 per cent this month, copper 11.8 per cent, nickel 9.3 per cent, rhodium 7.0 per cent, and Brent crude 5.5 per cent to just short of $70 per barrel. Equities performed well with those markets further ahead in the vaccination rollout, perhaps doing better. Optimism about a rebound in UK consumer spending helped the FTSE AIM All-Share and the FTSE Small Cap index gain 7.3 per cent and 5.1 per cent, respectively. The FTSE All-Share was up 4.3 per cent and, in the US, the S&P 500 rose 5.2 per cent and the NASDAQ Composite 5.5 per cent. In Continental Europe the CAC 40 was up 3.3 per cent, the Dax +0.8 per cent and MIB +0.1 per cent. Japan, battling a resurgence in COVID cases, saw the Nikkei down 1.3 per cent.

Government bonds had a reasonable month. In the US, the yield on the 10-Year Treasury fell back to 1.65 per cent. Perhaps a pause for breath after a year of gains took the yield from a low of 0.5 per cent last July to 1.7 per cent in March. In the UK, government borrowing costs remain very low at 0.9 per cent for the 10 Year gilt, albeit the highest since June 2019, when we talked about Brexit rather than Covid!

Performance: Back to growth

Following a frustrating March, April proved a good month for both portfolios. The JIC Portfolio was up 3.8 per cent, just short of the 4.3 per cent for the FTSE All-Share (TR) Index, but at 10.6 per cent for the year so far, just ahead of the All-Share's 9.7 per cent increase. Since inception in January 2012, the portfolio is up 353 per cent (17.6 per cent annualised) comparing favourably with +95.3 per cent for the All-Share, (7.4 per cent annualised) over the same period the FTSE All-World (GBP, TR) Index is up 230 per cent or 13.8 per cent annualised. The stars of the show in April were K3 Capital (K3C) up 14.8 per cent, Central Asia Metals (CAML) up 11.2 per cent, Renew Holdings (RNWH) up 10.8 per cent, Sigma Roc (SRC) up 10.6 per cent, BlackRock World Mining (BRWM) up 10.1 per cent and Sylvania Platinum (SLP) up 10.0 per cent.

K3 Capital issued a trading update containing what should be every investor’s favourite phrase – "We now anticipate the result for the year ending 31 May 2021 to be significantly ahead of revised consensus market expectations". Earnings per share for the year ending 31 May have been upgraded from 9.9p in January to 15.2p now. Admittedly this is only just above the 14.9p forecast last June – it's all about managing expectations! The shares are up 50 per cent on my average price since I bought in November and January, leaving them on 21.9x for the year just ending. That seems reasonable for 30 per cent growth, especially if the momentum continues into the year ending May 2022. Central Asia Metals benefited from copper hitting a nine-year high and from encouraging Q1 results.

At the end of March, it smashed expectations with a final dividend of 8.0p versus consensus forecasts of 5.0p. Nothing more from Renew Holdings following its bullish update in late March. SigmaRoc posted results as well as expanding its Continental European business. Management is pursuing a buy and build strategy, a playbook that the executive chairman has successfully followed in the past. BlackRock World Mining's performance reflected the strong commodity markets in April, and likewise, the continued strength of rhodium helped Sylvania Platinum.

To prove that releasing an upbeat update doesn't always work, De La Rue (DLAR) was down 13.7 per cent in April. On the 13th, it said results would be at the top-end of expectations with solid cash flow leading to net debt at the lower end of forecasts.  The shares look super value to me on current projections - 11.5 times earnings to March 2022 for 19 per cent growth and 8.5 times to March 2023 for 34 per cent growth. Either the forecasts are wrong, or this share is probably the most undervalued in the JIC Portfolio.  Perhaps results on 26 May will provide more clarity.

The JIC Funds Portfolio was up 6.2 per cent compared with  4.0 per cent for the FTSE All-World GBP Index. It is up 8.1 per cent this year, a smidgen ahead of the  8.0 per cent for the Index. Since its inception last June, the Funds' Portfolio is up 33.0 per cent versus +21.2 per cent for the All-World and  19.9 per cent for the All-Share. All 16 positions were up, with 10 of them more than the  4.0 per cent of the All-World. BlackRock's achieved a hat trick with BlackRock Throgmorton  10.8 per cent, BlackRock Greater Europe  10.4 per cent and BlackRock World Mining 10.1 per cent.

Activity: All quiet here

Nada. No trades in either Portfolio. My problem is not finding new ideas to buy but deciding what to sell. Given that I'm broadly happy with my holdings and the shape of the portfolios, I settled for the first time in 112 months to sit on my hands. Like last year, I have kept a copy of the year-end portfolio. It's only four months in, but it's good to see the few trades I have done this year have added value over doing nothing. The "live" JIC Portfolio is up 1.0 per cent more than the untouched JIC 31 December 2020 Portfolio. I have a few ideas for trades up my sleeve. Still, valuation will drive my thinking, and I'm determined to run my commodity exposure.

Commodities: It’s all about copper

The four non-oil commodity holdings made up 27.3 per cent of the portfolio on 30 April, up from 19.7 per cent at the start of the year. Much of the increase is due to good performance, but I also increased two positions. As regular readers of this column and the website www.jicuk.com will know, I added to my holdings in Anglo Pacific and Central Asia Metals during Q1. I'm relaxed with the current exposure, believing that this commodity cycle has much further to run. One of my main reasons for bullishness on metals is the increase in demand from the transition to a greener, cleaner, global environment. That, on top of the natural increase in demand from global economic growth.

You don't have to look far to find an article pointing to the yawning gap that is developing between supply and demand in the copper market.  A recent column by Richard Mills on KITCO pointed out that a battery-electric vehicle contains around 83kgs copper compared to between 8 and 22 kgs in a conventional car. If, by 2040, current forecasts that 30 per cent of the total global car fleet of 1.6bn are electric prove correct, "that will require 42.5m tonnes of copper, which is about twice the current volume of copper produced by all the world's copper mines." Goldman Sachs published a note, "copper is the new oil", in which it forecasts that during 2021 copper will hit $11,000 per tonne ($5 per lbs) versus current $9,600 per tonne and could hit $15,000 per tonne by 2025.

Jefferies concluded: "The copper market is heading into a multiyear period of deficits and high demand from the deployment of renewable energy and electric vehicles". Last week, Ivan Glasenberg was quoted in the FT saying that the copper price needs to rise 50 per cent to encourage enough new supply.

The following chart from Wood Mackenzie nicely encapsulates the growing supply shortage.

Much of what holds for copper applies to other metals as well. Nickel, zinc, and cobalt are all used in batteries, and demand is likely to far exceed the supply of these "green" metals.

After such a strong run, there might be a risk that shorter-term speculators book some profits, and prices fall back slightly. I think, however, the medium-term case for maintaining a decent exposure is compelling. The resources sector makes up around 16 per cent of the FTSE All-Share. If after achieving one's primary objective of making money, the other is to beat the Index, this might be the year where having high exposure to industrial metals and mining might pay off.

Outlook: Inflation and recovery

I think things look set fair for the next few months at least. As lockdown eases further, the rebound should be swift and robust especially compared to the dismal second quarter of last year. The two big questions are, when will the recovery be discounted by markets and will inflation cause problems? At least for the UK, the answer to the first is, I think, not in the short term. Valuations are attractive and corporate profits should continue to beat expectations. As for inflation, the £5 central London pint has become the £6 pint. I think it is inevitable that inflation picks up, but by how much and at what stage will it cause concern. During 2011, consumer price inflation exceeded 4.0 per cent for much of the year, peaking at 5.2 per cent in September. The Bank of England was not outwardly concerned, and indeed the rate drifted down to 0 per cent over the next few years. So perhaps we should be relaxed while it is below 5.0 per cent. The other indicator to watch will be wage inflation. If inflation picks up because of rising input prices, the Bank of England is more likely to see it as a temporary phenomenon than if it starts to feed through to wage settlements. The long and short of it is that I'm happy to stay fully invested for the time being.