Don't let the macro outweigh the micro: How a commodities fundie picks his winners

Macro narratives are powerful things. They foment fear in bear markets and fuel confidence in bull markets. But narratives also do their best to mask opportunities. 

The saying that “The market is always right” is, well, kind of wrong. Markets are not always efficient, nor do they always correctly price stocks on a value basis. 

If a market "corrects" it follows that it was, at some point, wrong. 

And it's in this re-rating where you find opportunities.

In today’s episode of The Rules of Investing, I sat down with Luke Smith from Ausbil Investment Management. Luke runs Ausbil’s Global Resources Fund.

His approach to investing starts with a top-down view of commodities sub-sectors. But that doesn’t mean he buys into the prevailing narrative; just the opposite. He uses high-frequency data to form his own picture of the macro-economic landscape, to find opportunities the market is missing.

With these “macro anchors”, Luke is able to block out the noise and make sense of this highly volatile market. 

“It’s far too easy to be negative in a negative market, but the flip-side and where the real opportunities are, and the returns are generated, is having counter-consensus views that are substantiated by underlying data.”

In this wire, I dig into three of Luke’s key insights from the podcast that can help you separate the noise from the signals, and market consensus from value opportunities. 

West is slowing, East is accelerating

It’s not a stretch to say that fear pervades today’s markets. There really isn’t much optimism about.

And the same extends to China. The news gravitates to debt risk – namely defaults among China property developers - slowing growth, COVID shutdowns and the like.

But for Smith, the fear surrounding China doesn’t marry up with his own analysis.

“There’s pessimism around what’s playing out in China at the moment that doesn’t tie back in with industrial-related activity. It doesn’t tie back into coal consumption which for us is a proxy for industrial action.”

“What we’re seeing from a data perspective, the micro, the underlying data around stimulus, around the health system, around industrial-related data… supports the fact that China is setting up to accelerate in a period where the west is decelerating.”

This is good news for commodities because China accounts for roughly half of the global market. Couple that with constrained supply, 30% electric vehicle penetration, and an influx this year of special purpose bonds, and you’ve got a sector with some serious tailwinds. 

Copper is more than an economic doctor

Copper is much more than a bellwether for economic growth. 

"The number of people I have to hear say “Dr Copper”, in terms of a commodity that just reflects people’s views on economic growth," says Smith.  

"But the fundamentals for copper are extremely tight – inventory at extreme lows, lack of investment in new supply. If the last couple of weeks highlight anything, positioning in these commodities is so negative, yet the micro setup is very positive."

Add electrification into the mix, and things get really exciting. 

"There is six times as much metal in an electric vehicle than there is in a combustion engine vehicle. On top of that, you have transmission, recharging, and it’s all copper-heavy." 

All told, Smith expects demand for copper to double over the next ten years. 

Finding relative value

Once Luke has high conviction at the macro level about a commodity, he goes to work finding relative value within the suite of companies in his investable universe. His is a global mandate, so it's a big universe.  

He uses his investing history in lithium as a prime example where Ausbil has chased relative value across markets. 

"You look around globally and Chinese lithium companies are quite expensive, US lithium companies are similarly expensive, so we started by owning the Aussie producers."

Those included Allkem (ASX: AKE) - the merger of Galaxy Resources and Orocobre, and Pilbara Minerals (ASX: PLS).  

As they re-rated, Ausbil shifted towards the Aussie developers, such as Core Lithium (ASX: CXO), one of the new producers in the hard rock spodumene space.  

"We had this one macro theme, and we started by owning the aussie producers, shifted into the aussie developers, then on relative value the Canadian developers were lagging as well," says Smith. 

"Then we saw a lot of M&A in the Canadian market, and we saw those names get consolidated. So as the relative value has shifted over the last 2 years, we’ve just rotated."

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