This article is authored by MOI Global instructor Marta Escribano, principal analyst and partner at Salmon Mundi Capital, based in Madrid.
In our view, the continued monetary policy actions executed by central banks have created bubbles in many asset classes all over the world. The market capitalization of global equities has surpassed the global GDP (a level that was only reached in 2000 and 2007). We also believe that in many countries both real estate and bond markets, are severely overvalued.
We are very concerned about the Chinese massive credit bubble. The country’s real estate sector and related industries represent around 30% of GDP. Chinese people exposure to this bubble is huge, as most of them own a property and the real estate accounts for a large share of Chinese households’ wealth.
Despite the uncertain times we are living through, we have been able to find very attractive investment opportunities.
Our largest position is in gold miners. We consider gold as a unique asset for uncertain times. Historically gold has widely outperformed, both equities and bonds, in inflationary periods and it is lowly correlated with traditional assets. Gold tends to move in tandem with real yields. Ten-year real yields are currently negative and we expect them to become more negative in the future. Gold miners offer very strong fundamentals. In recent years they have taken advantage of higher gold prices while maintaining cost under control. As a result, their operating margins reached record levels in 2020. Besides they have healthy balance sheets most of them with net cash or very low levels of debt.
We also find good investment opportunities in the tobacco sector; it is oligopolistic and offers a cheap valuation. Despite cigarette volumes are decreasing, the industry increased its revenue 25% in the last decade. The main reason is tobacco company’s huge pricing power. Largest tobacco firms are increasing prices at an annual rate of around 6%. The number of smokers has been stable since 1990 and, according to OMS, it is expected to remain similar in the coming years. Big tobacco companies have a huge opportunity in less risky products such a heated tobacco or e-vapours. In these categories volumes and consumers are increasing exponentially.
The fertilizer sector also offers an attractive opportunity. Agricultural commodity prices are at their highest levels in more than a decade and energy prices have risen sharply. Historically, food prices and energy prices have been highly correlated with fertilizers prices. China is importing huge amounts of food (in 2020 imports of cereals and grains rose 171% YoY). Furthermore, global grain inventories remain at low levels (world stock to use excluding China is at one of the lowest levels in 20 years).
In Russia we are finding leading companies, with unique assets at very attractive valuations. Russian companies are very well positioned to take advantage of raising oil and gas prices. The country has low public and private debt levels, and its reserves more than cover its total external debt. Its Central Banker has a very orthodox approach, and she has been one of the first implementing tapering worldwide.
All in all, we think we are in an uncertain scenario with bubbles in many asset classes, but we are being able to find good opportunities in leading companies at very attractive valuations.
* Salmon Mundi is a Spanish Sicav which trades in the Alternative Exchange in Madrid. Our investment philosophy is based on two pillars: Value Investing and the Austrian School of Economics. We invest all over the world mainly in equities, both long and short. We are interested in assets, sectors, or countries out of favour, where little capital has been invested during long periods of time. We search for world leading companies with unique assets.
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