FYI | Mar 21 2007
One of those recurring self-promo ads on one of Australia’s commercial TV stations shows the main characters from a popular US sequel briefly on the screen with a short statement for the viewer.
My favourite is the blonde prosecutor who says something along the lines of I believe there are two sides to each story, sometimes even more.
I had similar thoughts when one of our overseas contacts sent me a story on George Soros a few weeks ago. Some journalist had kept track with Soros’ updated statements to the Securities and Exchange (SEC) authorities in the US and discovered Brazil’s Companhia Vale Do Rio Doce (CVRD) was now the largest investment of Soros’ fund.
At first you think the old fox has again beaten the herd by stacking up on well chosen resources stocks while the world was still contemplating whether copper was about to crash and oil would fall back to US$35 per barrel.
The next thought is that CVRD probably wasn’t such a hard guess, in hindsight. Bulk resources, and iron ore in particular, are the undisputed star performers of 2007 (after uranium) and if anything they should do well in 2008 as well. Such is the change in overall market sentiment over the past three-four months.
Adding to this is that a truly experienced market watcher such as Soros would have anticipated the company would re-rate in the case of a successful diversification strategy and acquiring Inco, which gave CVRD access to the surprising nickel performance so far this year, proved to be the ideal trigger.
Of course, the main question that now comes to mind is has Soros started to offload some of the CVRD shares by now? We won’t know until the next SEC update.
According to the journalist who did the initial digging, CVRD is the ultimate BRIC stock (Brazil, Russia, India and China) with leverage to a buoyant steel market and a sure-fire bet on a weakening US dollar.
The outperformance of CVRD shares vis-à-vis the big Australian diversifieds BHP Billiton (BHP) and Rio Tinto (RIO) since November last year is nothing less than stunning.
For those who want to have a look themselves: CVRD’s stock code on the New York Stock Exchange is RIO. Compare with BHP.AX and RIO.AX on Yahoo! Finance and you’ll see the term “stunning” is far from an exaggeration.
Here’s is where the story becomes interesting.
Many a resources specialist has been arguing since January that smart investors should position themselves for a come back of the sector. You all know the arguments by now: the rest of the market is expensive while resources stocks are cheap, gold will move beyond US$700/oz soon and China has no intention of losing its appetite for basic materials.
I suspect that as part of this ongoing debate, the email with the Soros fund update landed in my inbox.
At first sight the Soros story reinforces the pro argument, especially with the journalist pointing out how many other savvy investors had picked CVRD as one of their top investments as well, such as Moore Capital (run by famed trader Louis Bacon) and Janus.
But look further and the picture changes dramatically. Online service stockpickr.com allows investors to have a peek into portfolios of famous mastheads, such as Soros. I had a look through the latest known facts (http://stockpickr.com/port/George-Soros/) only to discover that CVRD is actually one of the very few natural resources stocks held by the Soros Fund.
I flicked through five pages of registered investments (all data as at December 2006) and if my memory is correct, I saw one diamond company, one oil service provider and a few oil and gas explorers and –at the very end of the list- Apex Silver Mines, accidentally also owned by the above mentioned Moore Capital.
So what first appeared to be a token support for the pro-resources camp now adds weight to the opposite argument. The rest of the Soros fund’s money is in shares of healthcare providers and technology companies but above all in cleaner energy alternatives. The fund’s second largest investment, International Rectifier, is specialised in power management tools and applications. Soros undoubtedly sees opportunities in a climate-change driven future.
Soros is believed to be leaning towards peak oil sympathy. As mentioned above, the fund’s portfolio contains some direct oil exposure. Number three investment is Basic Earth, a fast growing oil and gas exploration and production company.
Another standout conclusion seems to be that Soros is banking on an upswing for the telecommunications sector with several of his high technology investments in effect representing leverage to new telecom equipment and applications.
Of course, the Australian share market doesn’t have the same wealth in diversity as the US market has. One of the star performers in the local industry is mobile telecommunications and broadband data services provider M2 Telecom (MTU). But I doubt whether a company with a total market capitalisation of –wait for it!- $29m would ever land on the radar of Soros’ fund managers.
Commodities specialists at Smith Barney Citigroup repeated their call this week that natural resources are an investor’s best friend in the Australian market right now. The broker recommends BHP Billiton (BHP), Zinifex (ZFX), Oxiana Resources (OXR), Jubilee Mines (JBM), Resource Pacific Holdings (RSP) and Newcrest Mining (NCM) in particular.
A little bit unsettling was Macquarie market strategists’ update on Monday. Hot on the heels of the market’s RBA driven changing attitude towards interest rates this year (don’t worry says GSJB Were, the RBA will bark but not bite) the strategists revised their outlook for the Australian share market to a total return of 5% for the coming twelve months.
5% means 4% dividend and a quasi-similar index level in a year from now. Echoing the message from Citigroup, Macquarie expects resources stocks to generate a total return of 15.0%. Industrials should return 0.9% only. Total projected return for the local small cap index is negative.
Read between the lines and Macquarie sees banks as the safest bet available this year (most certain earnings growth projections).
All of a sudden another interest rate hike by the RBA looks completely different.
Till next week!
Your I agree every story has more than one angle editor,
Rudi Filapek-Vandyck
(As always supported by the Fab Three: Chris, Greg and Terry)