Extraordinary times create extraordinary opportunities. A financial crisis in developed economies has caused stock markets across the world to crash. But unless the world goes bust, this presents huge profit opportunities.
The mother and father of all these opportunities is resources. The big developing economies - China, India and Brazil – are predicted to grow at rates of 6-9% over the next few years, even while Western economies suffer a recession.
They are relatively unaffected by the credit crunch, and in the case of China and India are in the early states of the biggest infrastructure spending boom in history, amounting to over $1 trillion over the next five years. Roads, railways, schools, hospitals, power stations, water treatment plants, airports, housing – the list goes on. They have the money - China and India have huge foreign exchange reserves – and are much less dependent on exports to the developed world than they were ten years ago.
Demand outstrips production
This means that demand for many forms of natural resources - oil, gas, minerals and foods – is likely to grow far faster than production capacity. Because the prices of many commodities have slumped as hedge funds and other speculators using bank borrowings have been forced to sell, producers are mothballing or delaying expansion plans. One example is gold, where 2008 production will be the lowest for 11 years. Another is copper, where millions of tons of new mine capacity has been deferred.
The credit crunch has focused attention on a likely Western recession. But this will only reduce demand for resources by a small amount. We may try to make our homes more energy-efficient, but collectively we’ll still use pretty much the same amount of gas to heat our homes this year as last. And even if we all cut our petrol use by 10% in the UK, this is still a tiny fraction of the annual increase in demand from China alone.
Down to doomsday levels
It’s not just resource prices that have crashed. The prices of shares in producing companies, especially mines and oil companies, have collapsed even more, in many cases by 70-80%. Yet provided these companies have access to finance, they will make good profits even at current resource price levels, which means they will make massive profits when prices rise. ‘When’, not ‘if’, because it’s impossible to create a scenario in which, for example, the oil price is still $70 a barrel in five years’ time without assuming the virtual collapse of the world economy.
I’ve had a close look at JPMorgan Natural Resources, the longest-running investment fund in the sector. It has lots of features I like. The manager, Ian Henderson, has 30 years’ experience in resources and has managed this fund for over a decade. The fund has some 300 shareholdings in different companies, mainly small and medium sized ones where the potential for gains is biggest.
It holds a balance between energy (33%), gold and precious metals (31%) and base metals (24%) and the bulk of its investments are in companies based in politically secure countries like Canada, Australia and the US (though these companies’ operations often include a lot of activity in the developing economies). JPMorgan is one of the world’s largest investment management companies, with a huge network of people on the ground all around the world ferreting out new investment opportunities.
Amazing opportunities
The managers say they have never seen such opportunities, including many companies whose stock market value is less than their holdings of cash, let alone their business operations. They also point out that when commodities enter a bull phase, it typically lasts for about 18 years. The current upturn has only lasted 5 years.
Given the turbulence in world markets, you can’t be sure there won’t be another downward lurch in the next few months. But on a 5-year view this looks like one of those tremendous opportunities that only come along once or twice in a decade.
And here are the figures for what you would have made from a regular savings plan in JPMorgan Natural Resources. Over the past ten years a plan for £100 a month, with a total cost of £12,000, would have a cash-in value of £20,000 - and that is after a 60% fall in the price of the fund since the start of the year! Had you cashed in in January 2008, your ten-year £12,000 investment would have delivered a payout of an astonishing £80,000.
Might not be quite as good
Of course you can’t expect that to happen again. But who knows? When the boom in resources gets going again, it might run for many years before having another big setback.
This looks the ideal fund to use for a ten-year regular savings plan, which you can easily set up with a fund supermarket like FundsNetwork or Hargreaves Lansdown. Use a bit of the money you save when your mortgage interest rate come down to start a monthly savings plan.
And if you want to create a more balanced savings plan, see my article on creating a savings portfolio with several funds.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
