Commodity investing still attractive even with a different economic relationship with China

By Adam Pankratz

The year 2020 is shaping up to be the most tumultuous year since…well, probably only since 2016 if we’re being honest; tumult is an uncomfortably common thing lately. But you get the idea.

We’re barely halfway through the year and there is little light at the end of the Corona tunnel. Not only has 2020 given the world the endless distress of Covid-19, but also more Brexit turmoil, trade wars and an increasingly assertive and almost bellicose China to boot. With the excruciating experience of a United States election in full gear looming for the entire fall, one has to wonder if our collective “joy” will ever cease?

Of top investor concern must be the omnipresent US-China trade dispute, recently further aggravated by China’s Hong Kong security law and Huawei bans around the globe. US sanctions will assuredly be followed by Chinese retaliation and so the merry-go-round shall continue.

It might be calming to think this only a Trump-exacerbated phenomenon. But investors should be wary: China sanctions and a generally tougher line on China are about the only thing that has bi-partisan support in the US these days. While a Biden presidency will hopefully drop Twitter as the preferred channel of diplomacy in favour of more traditional means, the world should be prepared for a significantly different economic relationship with China. Sino-American and world relations are markedly changed for the foreseeable future.

Current trade tensions on their own, however, don’t mean economic relations are finished. How could they be? China can’t simply be ignored and indeed it would be foolhardy to do so. Gone are the halcyon days of yore, when all and sundry believed China would fall seamlessly into the US-dominated geopolitical order. The desired outcome now is that mutual interest prevails, followed by the emergence of a new geopolitical order. New architecture for a world trade system will be required, but it can, and should, be done.

Meanwhile, life and trade must go on somehow. This certainly applies to the materials sector as much as anywhere else. China needs to grow and it can’t without the world’s resources. For investors, it’s interesting to ask where the metals needed are going to come from. Aluminum, copper, lead, nickel and zinc stockpiles are all near five-year lows on the LME. Where might the needed metals come from when the economy picks up again? This remains unclear.

And make no mistake, the economy will pick up. For all the trade war talk, the Brexit uncertainty, the US election fear and whatever other problems the world may have, one problem still sits well above them all: Covid-19.

Remember that even if trade tensions between the US and China worsen, even if there is no EU-UK trade deal, and even if Trump wins in November and continues his rampage through the White House, a Covid-19 vaccine would create comparative economic bliss.

Recent news out of both the United States and the UK point to positive signs in this regard. Paradoxically, for the economy longer term, this may make politicians less likely to cooperate with one another as they know that whatever their actions, if Covid-19 goes away, they will still ride high on the economic winds of a Covid-free world.

Low interest rates play into this as well. In our current interest rate environment individuals, as well as corporations, need to earn a return from somewhere and government bonds, while safe, simply don’t give returns that investors can live off; they barely keep up with inflation. Government stimulus coupled with the low rates may explain more than anything why stocks continue to rise even as the economy struggles. Simply put: where else can you put your money other than the market?

Coming out of Covid-19 will be a process, not an event. China-US tensions and trade disputes will be a drag on the US economy, Brexit will continue to irritate. In the medium term, however, the world will need materials and resources if it is to work out of the Covid-19 economic hole. This presents patient investors with an opportunity, particularly those who can find materials and resource producers currently trading down in the dumps. It may be dead money for a while, but sooner or later that bet is likely to pay off as the economy inevitably picks up towards 2022.