Many investors ask me what I believe will be the investment thesis going forward? Where will growth come from between now and 2020.
The answer to this question is obvious and this is commodities, the growth in this sector will be key to global growth.
Out of all of the four main asset classes including bonds, shares, forex and commodities, only commodities can be said to be critical to life on earth and with a growing and generally a more prosperous global population, there will be more pressure on the earth's natural resources for man's basic material needs like food, clothing and housing.
This is not a new idea by itself, rather what needs to be new is to see the market in a different way and structure alternative ways to play this market. We are working on a number of proprietary means to invest in the commodities space because we see that it is commodities shortages that is prevalent and not oversupply.
There are regional markets that are oversupplied but not the global markets, the challenge is firstly a problem of distribution and secondly of speculation.
With regards to distribution, there is a global supply chain challenge that prevents products supplied in one area to get to another area where it is needed. The crux of this is collusion, regulation and protectionism where various market players particularly governments and regional organizations like the EU create additional barriers which artificially distorts markets and gives a wrong perception of the supply/demand equation.
One cannot read this in IEA reports or in Bloomberg but through my years of working in government, law and finance, it has allowed me to see the structures behind the news and that most of what we see in the media that has been put out for public consumption is false.
Most of what the investment professionals call analysis is incorrect not because the quality of research is poor or biased though it may be the case but at a very fundamental level, the premise on which the investment thesis is based is wrong because the analyst has been misinformed.
How much do analysts really know about the markets? How do we really know the supply/demand balance in the global economy, we just take the various agencies that reports this data at face value because we are certain that they are there to give us an unbiased view of the market.
What about gold or the dollar, employment figures and so on. A successful investor is a skeptical investor. A simple example was what is called Black Wednesday in 1992 when George Soros profited from Britain leaving the ERM.
What is significant about that event and can be extrapolated for our contemporary use is that we continually see that devaluation or revaluation of a currency or another significant event that will affect the global market is preceded by a vehement denial by the officials involved that this will happen but a skeptical investor is able to make his own judgment and take a position in advance of the inevitable event that will follow.
The second challenge is one of speculation because the global supply chain for commodities are dominated by traders who make money by taking advantage of supply/demand imbalances sop in many cases, they will restrict supply to artificially stimulate demand and sell for a higher price.
Aside from the possible moral issues with this approach, it makes it challenging to assess whether really there is a supply glut/increasing demand or whether it is just traders hoarding supplies.
What we are seeing in the Philippines is one example of where it will be profitable to be a skeptical investor. We are seeing mines being closed down for alleged breaches of environmental laws. In many cases, these breaches have not been released and in these cases, these shutdowns have been largely without warning.
It led me to begin to research what is the real reason for this action by the Filipino government who up to now have been actively bringing in FDI to develop their mining industry.
I have one hypothesis; this is that the government has a desire to restructure the industry to prioritize friendly locals.
Currently, in the Philippines, only one miner has a refinery plant, this miner is Nickel Asia Corporation, which has two mines.
Many in the government continue to agitate the banning of cheap nickel ore exports in favor of developing domestic processing capacity which will triple revenue from these mineral exports but that has been seen as too risky and the next best action to take is the suspension of licenses for alleged environmental violations.
This is a trend that we are seeing across South East Asia where manufacturing is being prioritized as it is rightly seen as an engine of growth for the economies.
This does bode well for the Malaysian government in the long term because they will be able to make more from exporting finished products and also reduce their current account deficit by not having to import stainless steel products that will be produced locally.
In terms of how this will affect the global nickel market, we have seen that demand continues to rise as stockpiles in the LME continue to fall.
Why this is not a sufficiently bullish trend on which to enter the market or add to positions, it portends higher prices because the nickel has been at a historical low with supply dwindling because of the recent low prices and looking at this chart below, nickel and gold have largely been positively correlated.
In fact, it is worth noting that gold prices have historically been a leading indicator for other industrial metals with a lag time of about 6 months.
It is my belief that we will see a significant rise in the price of all commodities including nickel going into 2017 and more volatility, which should allow investors to come in then cash out and go back in again.
A good way to play this nickel market will be to use an ETF like NINI, which is designed to reduce the pricing volatility that comes from short-term supply/demand imbalances in the market.
I also like EPHE, which gives a broader exposure to the Filipino market and economy. I am very bullish on the SEA and the Philippines is a good example.
Its GDP annual growth rate is 6%, its unemployment rate is falling, inflation is rising gradually and healthily, interest rates are falling and so is the government's debt to GDP rate.
Furthermore, wages are rising, the population is rising, loans to private sector are rising, personal savings and consumer spending are rising.
In conclusion, the Philippines is in a very sweet spot and as the global economy picks up, then it will result in very significant gains for investors in this nation.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.