The AMP Capital Dynamic Markets team recently identified platinum as a compelling investment opportunity - here's why.
Valuations show platinum was undervalued
Commodities can be valued by comparing their price relative to the long-term cost of production. A commodity is profitable when the commodity is trading above the price of production. In October 2017, there was a sell-off of platinum and its price fell below it’s long-term cost of production, making it undervalued and very attractive from a valuation perspective.
Source: Bloomberg, Societe Generale, AMP Capital. As at January 2018.
Cycle reveals a supply deficit
Inventories have been declining on the back of mine closures, low capital investment, and falling production, whilst global demand has remained solid and forecast to grow, creating a supply deficit. Additionally, a softening US dollar has made it cheaper for global buyers with European and Chinese markets amongst the biggest consumers of platinum.
Sentiment makes platinum a contrarian trade
Sentiment towards platinum has been negatively impacted by the positive sentiment of electric vehicles and the strong growth forecasts that markets are pricing in (as platinum is used more in conventional vehicle manufacturing). This saw platinum sentiment approaching excessive pessimism and speculators were extremely short. However, we see this as longer-term risk as conventional vehicle sales are still growing, making platinum a contrarian trade with strong upside potential.
Source: Sentimentrader, AMP Capital. As at January 2018.
Technicals confirm platinum was oversold
From a technical perspective, platinum exhibited oversold conditions and on a relative basis compared to other precious metals like gold and silver, platinum has been a significant underperformer suggesting there was room for catch-up.
Undervalued, unloved, and oversold
These 5 reasons led us to believe platinum was an undervalued, unloved, and oversold investment opportunity and a 2%* allocation was made within ASX: DMKT. The position was closed at a profitable price after platinum rose by over 10% as the price returned above its long-term cost of production and sentiment went from excessive pessimism to excessive optimism.
Platinum is a great example of where a relatively small allocation can improve a portfolio's overall return and diversification.
Source: Bloomberg, AMP Capital. As at January 2018.
For further insights from the AMP Capital Dynamic Markets team, please visit our website
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*2% of the DMKT portfolio as at October 2017
Important note: This article has been prepared by AMP Capital Investors Ltd (ABN 59 001 777 591, AFSL 232497) ("AMP Capital"). BetaShares Capital Ltd (ACN 139 566 868, AFSL 341181 ("BetaShares")) is the responsible entity and the issuer of units in the AMP CAPITAL DYNAMIC MARKETS FUND (HEDGE FUND) (the “Fund”). AMP Capital is the investment manager of the Fund and has been appointed by the responsible entity to provide investment management and associated services in respect of the Fund. Investors should consider the Product Disclosure Statements (PDS) for the Fund before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. Neither BetaShares, AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document.
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