I believe we’re approaching an opportunity that may only come once every 20 years — I’ll explain more below.
But before we do anything, I’m delighted and proud to announce that today…at precisely 1:00pm…we officially launched the all-new Diggers and Drillers advisory letter.
This presentation lays out why I’m so bullish on commodity stocks.
While it’s easy to get caught up in the inflation and interest rate jitters, as resource investors, we need to look beyond current volatility and keep our gaze firmly fixed on critical supply issues underpinning growth in the resource sector.
The fundamentals haven’t changed. Underinvestment means the industry hasn’t been able to deliver additional reserves to meet future demand.
Market fear has presented us with juicy opportunities for accumulating high-quality stocks. Companies with superior grades and long mine lives are rarely discounted like they are RIGHT NOW.
Few investors have the audacity to pull the trigger and buy against a wave of bearish sentiment — but for those that do, a potentially life-changing wealth opportunity awaits.
Capitalising on market nerves
Is the market turbulence keeping you up at night?
You wouldn’t be alone.
In times like this, it’s important to build your own conviction. This is the best strategy for investing against the crowd because, right now, the crowd is either selling or sitting on cash.
Should you be doing the same in the resource sector?
In order to answer this question, it’s useful to analyse past bear markets — particularly those echoing what we see today.
Examining historical market movements is an excellent strategy for building conviction and developing confidence to invest against mainstream sentiment.
Anyone that has studied the markets for a period will understand that common themes tend to re-emerge. It’s like that adage, ‘there’s nothing new under the Sun’, or so they say.
So let me walk you back to October 2002.
If you don’t remember, this was a volatile time in the markets and the world more generally.
Just like today, the world is facing geopolitical risks.
It was a tense period following the September 11 attacks.
Fear, based on the perceived risk of being attacked by terrorists, deterred travellers from boarding flights or catching public transport. Holidays were taken locally.
But it was memories of the 2001 dotcom bust that had investors perpetually resenting stocks and anything speculative.
The heavily tech-weighted Nasdaq Composite Index fell a staggering 78% from its 2000 peak. Investors that took big stakes in new IPOs and zero-earning stocks suffered the biggest losses.
The experiences back then mirror those today.
The market is decidedly pessimistic right now with discounting across the board.
Tech stocks have been hit especially hard, and for a good reason.
Valuations, just like in 2000, were overblown, and it took a slight increase in rates to push the sector over the edge into, what I believe will be, an ongoing secular bear market for the industry.
The outlook for tech is not strong, but this doesn’t mean all sectors are setting up for a multiyear downturn.
Stepping back to the year 2002
Almost 20 years ago, on 10 October 2002, the US S&P 500 Index made its final low.
While I’m not claiming we’ve reached the final major low in today’s market, what followed back then was an enormous opportunity for those who entered the market against a tidal wave of fear and anxiety.
But only if they knew where to invest.
The ability to recognise a new class of assets to follow the next big trend allowed early investors to amass a fortune.
I look back on 2002 as a major transitional shift in asset allocation.
The global financial fraternity moved from tech companies to stocks with exposure to real assets. That’s mining, real estate, and banking.
History is most certainly rhyming, as you will see right here.
The early movers made enormous multiyear gains
Alongside banking and real estate, mining stocks played a pivotal role in helping the ASX 200 Index post a 150% gain from the dotcom lows.
It was one of the best-performing index’s globally — but individual stocks profited the most.
Even blue-chip miners grew exponentially over this time.
From the dotcom low, BHP Group’s [ASX:BHP] share price rose more than 500%, while Lynas Rare Earths [ASX:LYC] posted a whopping 1,200% within a short burst later in the boom cycle.
Have a look for yourself at the charts below.
2002–07 BHP Group
2002–07 Lynas Rare Earths
It’s not often we see blue-chip stocks clocking gains akin to a small-cap growth company, but this is exactly what happened for many of the large mining producers at the time.
2002 marked an important transition.
As the market digested the events from the end of the tech investment era, investors poured into this ‘new’ asset class.
The events that transpired back then are precedents for what you could expect over the coming years in commodities.
Again, this is the very reason we’ve launched a brand-new service dedicated to helping readers take advantage of it.
What will push investors back into this market?
We’ve experienced a decade of low interest rates and modest inflation.
This was a great period for technology stocks, fuelling a 7–8-year bull run that started in 2013 and peaked in early 2022.
The economic environment nurtured growth stocks, operating on minimal cash flow, and surviving on cheap debt.
But the tide has most certainly changed. Investors are continuing to jump out of equities as systemic inflation breeds fear of how far interest rates will climb.
Of course, this fear won’t last. Cash is a terrible investment during inflation.
Despite global central banks lifting rates, those sitting on cash continue to receive a negative rate of return.
This will push investors back into equity markets. Assets that can taper the effects of inflation will benefit the most.
The traditional playbook for investing in this environment typically means owning physical assets or company stocks tied to producing physical assets.
However, for the moment, ALL asset classes have cooled, including those that we’d expect to outperform in an inflationary environment.
Stocks tied to real estate, mining, and utilities have fallen hard, along with the broader market.
But the rules haven’t changed.
Holding cash right now equals wealth erosion.
The exodus from cash into ‘real equities’ will be rapid and unexpected.
The ‘Great Asset Transition’ is imminent.
Editor, The Daily Reckoning Australia