M12 BARRON’S October 12, 2020
MarketView
Opportunity in Energy Shares
Systems & Forecasts
Signalert Asset Management
signalert.com
Oct. 7: Although the equity outlook is un-
certain, the energy sector seems attractive
and...may be a good investment during
these times.
It appears that investors are baking in a
worst-case scenario, as the Energy Select
Sector SPDR fund is still down almost 50%
for the year. Since the introduction of S&P
sector SPDRs at the end of 1998, the Energy
Select fund has never been cheaper com-
pared to the S&P 500 index. Moreover, the
book value-to-price ratio of the fund is 1.1,
which means that the sector’s valuation is
slightly above the total asset value if all
assets on [component companies’] balance
sheets are liquidated. This ratio is at its low-
est since 1986, meaning that the sector’s out-
look is dismal.
Although October has seen a larger num-
ber of 1% swings than any other month, the
energy sector presents a rare investment op-
portunity, as the Energy Select fund is very
oversold, especially versus other sectors such
as technology. Buying the fund offers a po-
tential profit similar to my United States Oil
fund Buy recommendation earlier this year
(that trade captured a 42% paper profit). A
covered call position may be a safer strategy
if you want some downside protection in ex-
change for limiting the upside to 9.8%.
—JOONCHOI
Pimco’s 3-to-5-Year Outlook
Economic and Market Commentary
Pimco
pimco.com
Oct.7: Pimcorecentlyheldits39thannual
SecularForum,featuringitsglobaladvisory
boardandinvestmentprofessionals,andin-
vitedspeakers. Thegroupdiscussedthepost-
pandemic outlook for the global economy,
policy, politics, and financial markets over
thenextthree-to-fiveyears,andtheimplica-
tionsforinvestors’portfolios.Herearesome
investment conclusions:
What is clear, in spite of ongoing favor-
able asset-market returns this year—
during a period of crisis—is that the out-
look for asset-market returns over the next
three-to-five years is likely to be different
from the experience of the past decade.
Starting valuations in bond markets and
equity markets make it very difficult to en-
vision the ongoing inflation of asset prices
as the byproduct or the intention of policy
interventions, including with the best ef-
forts of central banks to offset the effects
of future negative shocks. Given histori-
cally low yields and high equity valuations,
it makes sense for portfolio managers and
asset allocators alike to lower their return
expectations rather than stretch too far
and extend too far down the quality spec-
trum in hope of maintaining historical
levels of returns. There is no shortage of
examples from history where investors
experienced multiyear periods of flat in-
vestment returns, or worse. The experience
of the past 10 years is not necessarily the
guide for the next decade.
We anticipate a broadly range-bound envi-
ronment, for government bond yields will be
maintained for much or all of the next three-
to-five years. Central bank policy rates are
unlikely to rise for a long period, and there
is some risk of a shift lower. We see both
downside risks to yields, in the event of a
broad shift toward negative policy rates, and
upside risks, if the monetary and fiscal ef-
forts lead to a sustained rise in inflation ex-
pectations. Indeed, while we see very little
upside risk to inflation in the near term, we
think that over time it will make sense to
hedge against a rise in inflation using Trea-
sury inflation-protected securities, or TIPS;
yield-curve strategies; real estate; and poten-
tially exposure to commodities.
The low yield environment and reach
for investment returns may continue to
support equity markets. But starting valua-
tions should dim any excessive optimism.
Indeed, the long-term history in Japan
over decades and the shorter experience in
Europe over the past few years show that
there is no guarantee of outsize gains for
equities over bonds, even in a very low-
yield environment.
—JOACHIMFELS,ANDREWBALLS,DANIEL
IVASCYN
Rapid Rebound in Global Trade
Market Navigator
SunTrust Advisory Services
suntrust.com
Oct.6: The global manufacturing sector has
moved back into expansion, albeit from
depressed levels. Strength is broad-based,
as 71% of countries reported higher output
over the past month.
At the depths of the Covid-induced eco-
nomic crisis, world trade volumes dropped
by 18%, similar to the decline during the
global financial crisis of 2008-09. The
current recovery in world trade is remark-
able. During the financial crisis, interna-
tional trade was depressed for a prolonged
period of time, with the trade-volume index
down 10% on a year-over-year basis for 10
straight months. This time, projections indi-
cate that world trade volumes are expected
to be above -10% levels after only three
months, providing a much faster recovery to
export-oriented economies like China, Ger-
many, Japan, and South Korea.
—KEITHLERNER
Robust Demand for Metals
Ahead of the Herd Newsletter
AheadOfTheHerd.com
aheadoftheherd.com
Oct.3: We find a surprising amount of good
news regarding metals demand hidden
behind the sensational headlines that...mark
the extremes of commodity-price movements.
First, the slow pace of growth, despite
China’s success in pushing its economy
ahead an expected +2%—the only G20
country this year likely to grow—bodes well
for precious metals.
Interest rates are likely to stay low for
at least the next couple of years. Indeed,
with a U.S. debt-to-GDP ratio over 100%,
the government can’t afford to let interest
rates rise too high—the interest payable on
the debt would quickly become unmanage-
able. Low interest rates and rising inflation
result in negative real rates, a surefire cata-
lyst for gold (and silver).
Meanwhile, silver and copper are on an
upward trajectory and will continue to do
well under a Biden or Trump infrastructure
push. Clearly, copper, with all its green-
energy applications, will be more in demand
under Biden’s plan. Same with silver, due to
its application in solar panels (millions of
them under Biden).
Copper, too, will be in heavy demand
from Chinese stockpiling. At the end of Au-
gust, prices hit a 26-month high due to the
strong Chinese rebound, and we have seen
the effects of Chinese panic buying. In early
September, LME warehouses reported their
lowest copper stock levels since 2005, as
Chinese buyers scrambled to purchase
material. The result was the copper price
pushing to a two-year high of $3.09 a pound.
And while stockpiles increased recently,
they are still way off historical levels.
Finally, iron ore prices will continue to get
a boost from China, as steel smelters ramp
up to meet demand from the country’s huge
construction and manufacturing sectors.
Another key industrial metal, zinc, has
benefited from strong Chinese metals de-
mand. While prices fell 17.3% during the
first quarter, owing to pandemic-related
uncertainty, they have since recovered, with
three-month zinc averaging $2,121 per tonne
over the first eight months of the year.
The coronavirus has been devastating for
many aspects of the global economy, but for
some of the most important mined commodi-
ties, it’s business as usual. Owning gold, sil-
ver, zinc, and copper, or better yet, the com-
panies exploring for them—offering the best
leverage against rising prices—continues to
be my investing strategy.
—RICHARDMILLS
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“Givenhistoricallylowyieldsandhighequityvaluations,itmakessenseforportfoliomanagers
andassetallocatorsaliketolowertheirreturnexpectations.” —JOACHIMFELS,ANDREWBALLS,DANIELIVASCYN,Pimco
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