Our view of this sector is well known. Nothing has happened yet to stop China’s urbanisation programme and their ever growing demand for raw materials. Their sensitivity to that situation is such that it makes sense for them to gain control wherever possible and the channelling of their surplus funds into natural resources is understandable. In the short-term, the disruption caused by the credit crunch might impact negatively upon commodity prices and resource stocks because stressed investors may be forced to sell whatever they can to finance client redemptions and margin calls. A margin call is when a provider of credit requires additional cover to maintain the line of credit already in place, a very destructive but inevitable part of the credit crunch process.
A few days ago we decided that our exposure to resource investments was tilted a little too far on the equity side of the equation. For that reason, we made a strategic decision to sell our holdings in BlackRock Merrill Lynch New Energy that comprised about 20% of most portfolios. This investment was priced at a high level and gave us the opportunity of banking good profits. At the same time, it has provided ammunition to use to the portfolio’s benefit as investment conditions clarify. Our view about the long-term value of the new energy investment remains unchanged and in due course, we look forward to buying it back for less than we have sold it.
Gold related investments have performed satisfactorily during this period although there has been some pull-back. For the period 2000 onwards when stock markets were in serious decline, investments in gold mining shares performed very well.
Energy is fundamental to just about everything. For the time being we consider it appropriate to retain these investments. They have also performed well in previous stock market declines. From 1972 to 1975, oil stocks because of the very high oil price did very well in spite of the UK stock market falling 75% over that time span.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/