Bartlett Commentaries
Market Commentary, 03 / 2006
The investment landscape began a fundamental shift in 2002 that is only now becoming widely acknowledged. In that year, the price of commodities such as copper, iron ore, and scrap steel established their lowest price levels in over 25 years. Since that point in time, the overall direction of commodity prices has been up. After such a long period of declining commodity prices, the inflation premium commanded by investors, particularly for bonds, had dwindled to historically low levels. It has taken until only recently for investors to begin to incorporate into their investment thinking the prospect that input prices are once again a factor to be reckoned with. This can be seen in the upward movement of interest rates, precious metals and the increasingly cautious tone found in the equity markets. This phenomenon is not without parallels.
A recently published study by the World Bank indicates that during the last century, this would mark the fourth turn for commodity prices and interest rates. The usual lag between the inflection point of commodity prices and that of interest rates is 3.5 years - just about what we have recently experienced.
Our view is that the markets are only now moving toward alignment with this evolving environment. The risk premium in the bond market is still well short of where it should be to properly compensate investors for credit risk and rising inflation. The valuations at which many small and mid-cap equities are trading overly discount the inherent volatility of those asset classes. Unlike the decades of the eighties and nineties, managing to an index is no longer a virtue. The leaders of the last bull market, technology, healthcare and consumer stocks, will enjoy brief periods of outperformance as the shares of energy, basic materials, and their suppliers emerge as the persistent driving force acting as a backstop to both the economy and the equity market. In our work, we are finding that opportunities vary by economic sector in size, structure and even national origin.
We ascribe to the view that if we can simply follow the money, opportunities will present themselves. It was in this fashion that we realized that the major integrated oil companies are increasingly constrained in terms of the economic benefit they can derive from higher oil prices, as governments demand greater royalties and taxes. However, even those governments must buy equipment and services, leading us to our investments in Schlumberger, National Oilwell Varco and Nabors Industries in the energy sector, Dover in the industrials, and Questar in the utilities sector.Instead of looking at each investment in isolation, the portfolio is a mosaic in which each piece has its role to fill and is related to all of the other pieces. The main objective is to deliver to our clients a rational approach to the business of creating wealth during a time of substantive change, not only in the nature of future risks, but in economic power.
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.