As long as I have been writing about alternative investments, experts have been predicting a new leg up in the commodity cycle. Over the last few years, most though not all, commodities have had a dismal time but 2020 proved to be a real bloodbath for the sector. But by late 2020 the numbers were beginning to turn and I’m growing more receptive to the idea that we might be fast approaching a key inflection point when large bits of the commodity spectrum start to roar ahead. I’m not remotely certain of this turn but I’d give it a 40% probability if pushed that we’ll see a major bull run over two or more years in commodities. That might even impact the energy complex though I’m slightly more skeptical about the prospects for oil and gas prices.
Why my cautiously bullish stance? A number of tailwinds come to mind. First the concerns about a reflationary economy pushing into inflationary territory, which could in turn prompt speculators to pile into some parts of the commodity spectrum as inflation insurance. I also think some parts of the commodity spectrum related to the Green push will benefit from very strong multi-decade secular drivers. I also think that we have seen very capacity destruction in some segments of the spectrum and although excess profits will surely drive-up supply, I’m not entirely sure there is enough elasticity in supply for some commodities. Related to this tailwind is a growing big power scramble to secure some key commodities as tensions increase. Lastly, I think we might be about to experience a weaker dollar which could be beneficial for commodity prices.
Grist to the mill of my possible commodity bull argument comes in end of year numbers on commodity markets from experts at SocGen. They report that the benchmark S&P GSCI (ER) index “saw a resilient 5.96% gain in December, building on the very significant 12.03% in November. Those brought the year-to-date decline to 24.02% as the index finished at 180.71. Five of the six sectors rose in December with the largest advance in grains, which was up 11.76% and bringing its year-to-date increase to 17.01%. Meanwhile, energy rose 6.33%, for a year-to-date decline of 46.49%. Both crude oils’ rose around 6-8%, but natural gas was the worst-performing commodity across all sectors for the second month in a row, falling 12.6%. Outside the energy complex, silver was the best performing commodity rising 16.9%, followed by corn at 13.6%. The precious metals sector rose in December by 7.46% with gold up 6.4%. Softs also rose, up 6.01%% over the month. Lastly, the industrial metals sector declined very slightly by 0.25%, bringing its year-to-date performance up 14.39%.”
Analysis period: 1 December 2020 – 31 December 2020. Unless otherwise stated, all price returns are calculated based on S&P GSCI Excess Return Component Indices.
Moving on to funds I have two updates on funds in my alternative funds trading list.
The first centers on Tetragon which only joined the list last week. A few readers have contacted me expressing their skepticism about this perennial unloved fund. I absolutely ‘get’ these worries and have some sympathy for the bear case but I simply believe those concerns are baked into the price already.
Anyway, I mentioned in passing that Tetragon has very recently initiated a legal action against Ripple, as reported by fund analysts at Numis.
Today comes an update from Matt Hose who’s been digging around in the legal paperwork, attempting to shine a bit more light on what the heck happened. The core issue seems to be the right to require Ripple to redeem its holdings of Series C preferred stock.
According to Hose,
“When TFG invested in Ripple in December 2019 it bargained for the right to require Ripple to redeem the investment if the SEC determined that XRP – the cryptocurrency used by Ripple in its payment system – is a ‘security’. As announced late last year, the SEC has now made such a determination and is taking enforcement action against Ripple. This means that at the time of TFG’s investment it understood the SEC was investigating XRP’s status and acknowledged it as a material risk. While it appears that TFG was well advised to seek this protection, the inevitable question levied at the fund is why invest in a company it knew was already under regulatory scrutiny? The answer is likely to be the asymmetry in the investment by having the redemption right (that it clearly felt Ripple would comply with), but also exposure to the upside should XRP have been given the all-clear by the regulator. Given recent cryptocurrency price moves, including XRP’s prior to the SEC’s announcement, this upside could have been substantial….In pure technical terms, the dispute seems to relate to Ripple’s insistence that TFG cannot redeem unless and until Ripple litigates the SEC’s enforcement action all the way through to a final unsuccessful conclusion. Here TFG is asserting that it is not required to wait out a lengthy SEC court process, specifically bargaining against such a risk when it agreed the redemption right. This also usefully highlights the current risk that the position is left in limbo during the court process between TFG and Ripple.”
The legal documents show Ripple holds around 55bn XRP, with a value at today’s prices of c.$10bn-$15bn plus the corporate entity seems to hold “ at least $250m in net cash, an amount consistent with its cash balance over the period of TFG’s investment, in turn meaning it has enough liquidity to fund TFG’s redemption obligation valued at $175m, or 7.5% of NAV”.
Back on slightly less controversial terrain, we’ve also had an update from another fund on my list Schroder European Real Estate which has reported a year-end 1.4% portfolio valuation increase;. It’s also provided numbers which suggest that rent collection is improving.
Here’s the Numis summary:
“ At 31 December Schroder European Real Estate’s portfolio was valued at €276.1m which equates to a 2.8% (€7.51m) increase over the quarter, (30 September: €268.6m). Excluding the €4.6m invested into the Boulogne Billancourt refurbishment, the like-for-like valuation increase was 1.4% (€2.91m). This was driven by yield compression and ERV growth across a number of the portfolio’s industrial assets as well as asset management initiatives including two new leases for 10% of the lettable area at its Hamburg office asset. The company’s net LTV stands at 25%, with no debt maturity before 2023. The 31 December NAV is due be released in early March. Rent Collection: To date, the company has received 89% of rent due for the fourth quarter, which ahead of 87% collected in the previous two quarters.”
Good numbers in my view and underpin why the fund – trading on a 25% discount – is on my list.