Investment Sectors to Love
If you are one of those spending the first 13 days of February frantically looking for the perfect gift to show a loved one how much you care, whilst simultaneously marvelling at the continually increasing cost of romantic cards, well, don’t tell the other half, but that money could be made to work hard in one of this year’s hot investment sectors. This is something to truly fall in love with.
In many ways buying a share in the stock market can be likened to starting a new relationship. If things are going well then everything looks rosy and, as long as the price continues to go up, you can’t bear to be parted so don’t even think of selling. And when things start going wrong, the most important thing is to not take it personally, and not to see every share price fall as an insult to your trading strategy. With every investment, take the rough with the smooth and accept that not every trade will be forever.
With that in mind, we think there is plenty in the stock market to fall in love with, not just this month, but for the rest of the year at least. So what sectors do we think are worth researching and adding to your portfolio?
A number of events are combining to make commodities one to watch in 2011. Prices of grain, rice and food are increasing and this is affecting the share price of companies that deal in them. Quantative easing and low interest rates are pushing up inflation, which hit 3.3% in November, directly affecting the cost of living and commodity prices. Numerous commodities have already made multi-year highs over the very recent past, such as sugar, whose futures hit a 30 year high recently as the world went from a supply surplus to a deficit in a period of just two years.
Not just inflation, but as emerging markets such as China and India continue to grow, their population will demand more food, and these increasing populations will take up more of the space set aside for growing food. This imbalance between supply and demand will mean that commodities will potentially be in sustained demand.
The Barclays Capital Commodity Research Index (BCRI), launched at the start of December, gained 9.7% on the month, with agriculture the strongest performing commodity sector due to a combination of factors including weather disruptions and strong emerging market demand. Barclays Capital said, “We believe agriculture will continue to outperform other commodity sectors in January and consequently we are overweighting this sector relative to all others.”
Oil and Gas Exploration
Analysing oil and gas exploration and production stocks can be overwhelming, and the sector can be extremely volatile. But, by doing their research, and being prepared for this volatility, investors can see significant profits, as well as, of course, significant losses.
Oil and gas companies are exploring new regions all the time, and with oil a finite resource which continues to grow in demand, the hunt is becoming extremely competitive. Drivers only need to look at the cost of petrol at the pump to see that new oil supplies are needed.
Oil and gas wells can generally be classified into two different types – exploratory wells and development wells. Sometimes known as a wildcat well, exploratory wells are those drilled to find new reservoirs (places where oil hasn’t been found in the past). Wells drilled into the known extent of a producing reservoir are known as development wells.
Exploratory oil wells are currently causing a great deal of excitement in the Falkland Islands, It has been estimated that there could be up to 60 billion barrels of oil under the sea bed. Due to climatic conditions exploration is difficult but economically viable, although the sovereignty dispute hampers progress. Companies there have had mixed success, illustrating the volatility in the sector. One such company was mentioned in last month’s issue, Desire Petroleum. To recap, on the 2nd of December, Desire Petroleum released news saying it had found oil in its drilling prospect off the waters off the islands. Its share price immediately soared 24%. Then on the 7th further news showed the fluid they found was actually water. Their value plunged by more than half. A look at the 52 week history of Desire Petroleum shows a 52 week high price of 180p, and yet a 52 week low price of 35p.
When oil and gas companies strike success, it often comes big, which often makes it worth, with the right research, picking up a few stocks and holding on for the ride.
Mining for precious metals such as gold and silver is still seeing success. 2010 saw a lot of activity in the mining and exploration sector. August in particular saw BHP Billiton launching an all cash hostile bid for Potash Corp of Saskatchewan at US$130 a share. Potash Corp is, by capacity, the world’s largest fertilized company. When the bid was made in mid August, it represented a 20% premium to the closing price on the 11th of August. This activity looks set to continue throughout 2011.
One of the most obvious drivers of the recent surge is the weak dollar. Most metals and commodities are traded in US Dollars, making it cheaper for those trading with strong currencies. Investors are favouring commodities and metals fearing that further quantitative easing will lead to currency devaluation and soaring inflation. The increased demand from the economic recovery is also coming up against restricted supply. Mining companies scaled back investment in new projects during the recession, and this underinvestment will hit the availability of metals for some time, according to the head of industrial commodities at Sucden Financial.
One of the biggest drivers of industrial demand is the growth seen in the emerging markets, particularly the BRIC countries of Brazil, Russia, India and China.
The continued growth of these economies has meant demand for commodities and metals used in industry escalate, as towns, cities, and the infrastructure to cope with it, expand. A sign of their rapid industrialisation is the fact that China has now become the largest CO2 emitter in the world, releasing 6.5 billion tonnes in 2008, or 22% of the world’s total. Russia is third and India fourth on the list.
So are these the sectors to fall in love with this Valentine’s Day? The only way to find out is to do your research, and give it a go.