Friday, 5 December 2014

A Gamble on Recovery (Portfolio Buy)

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Having generated some cash for my DIY Income Investor portfolio from a recent sale, I looked around for a good home for it. My first reaction is usually to look at the existing portfolio and see if anything looks attractive as a 'top-up'. By 'attractive' I mean 'high yield' (preferably as sustainable as possible) as well as holding some promise of capital gain over time.

This time I also did a little geopolical thinking. In other words, what is the most important factor currently in the world economy - and what are the implications?

I'm talking, of course, about the current - and seemingly unstoppable - fall in the price of oil. The key trigger appears to be the rapid recent growth in fracking in the US, which has shocked the traditional OPEC oil producers (as well as Russia). These producers are used to controlling the oil price but are now facing a dilemma: they have growing social programmes to fund, and cannot afford - politically - to constrain their oil production (and income).

I have heard economic commentators refer to the current fall in the price of oil as 'bigger than QE' in terms of the potential impact on the world economy. However, the link between the oil price and the health of the world economy is complex. Academic papers that I have seen (like this one from Middle Eastern Finance and Economics) struggle to demonstrate a clear link between the two.

My own take is that oil is fundamental to the world economy, particularly for transport, and its supply has until recently been more-or-less fixed. So the price of oil has - in the past - been more of an indicator of the health of the world economy. Consequently, the current low oil price might as much about a slowing world economy as about excess supply and US fracking.

However, I have decided to take a gamble - a gamble that the lower oil price will stimulate the world economy (particularly China, which is rapidly adjusting to car ownership), resulting in greater demand for mined products. Some commentators agree.

My favoured vehicle for minerals is my old favourite, Anglo Pacific Group (LSE:APF), a company that buys the right to royalties in various mines around the world. I have held APF on-and-off for many years and topped up in January 2014. Currently I am 'down' significantly on my initial investments - the share price has halved over the year. The yield is consequently tremendous - over 9%. I cannot see any obvious reason for this price fall, other than the general decline in demand for mineral products (royalties are usually linked to production). Otherwise, the management of APF seems to be saying the right things - an emphasis on dividends, diversification of royalties, good expectations for mine production.

So, being a confirmed contrarian, I have topped up and made APF my biggest investment so far in my investment efforts - a big gamble for a fairly cautious investor like myself.

And, wouldn't you know it, the price has disconcertingly fallen still further. Ah well, that's investing - it's very difficult to hit the top or the bottom: you just hope to get the longer-term direction right.

[Purchase price: £1.09]



I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

3 comments:

  1. Hedge Funds shorting Oil make a good few bargains - Premier Oil 5% 2020 is selling well below 100%

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  2. Interesting buy, and a great yield.

    I do think lower oil prices will stimulate spending as lower diesel prices are already apparent when I fill up, leaving more cash in my wallet to spend on other things. Although this is not a massive impact on me individually, my fuel spend is a small proportion of my total spending (low mileage), but a lot of lower income families spend a high proportion on fuel, so will impact them a lot more.

    Other benefits are transport costs being lowered, and in theoryshould feed through to gas and electric prices.

    Best Wishes
    FI UK

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  3. My only concern with this is that their last annual report states 2/3 of their income is from Coal. I know China is pushing down on coal consumption etc. Its the dirtiest fuel. If they were more diversified it would be less risky. But even if the dividend is halved its still high yield!

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