The 5 reasons we invested in platinum
Through the Dynamic Asset Allocation (DAA) process, the AMP Capital Dynamic Markets team identified platinum as a compelling investment opportunity.
The DAA process is supported by 5 drivers: valuation, cycle, liquidity, technicals, and sentiment. This is coupled with an investment philosophy to invest in assets that are undervalued, unloved, and oversold.
The precious metal platinum has various applications, including vehicle, mobile phone, and medical device manufacturing. It is also one of the most actively traded metals on the commodity futures market.
So how does platinum stack up against the DAA process?
Valuations show platinum was undervalued
Commodities can be valued by comparing their price relative to the long-term cost of production. A commodity is profitable when the commodity is trading above the price of production. In October 2017, there was a sell-off of platinum and its price fell below it’s long-term cost of production, making it undervalued and very attractive from a valuation perspective.
Source: Bloomberg, Societe Generale, AMP Capital. As at January 2018.
Cycle reveals a supply deficit
Inventories have been declining on the back of mine closures, low capital investment, and falling production, whilst global demand has remained solid and forecast to grow, creating a supply deficit. Additionally, a softening US dollar has made it cheaper for global buyers with European and Chinese markets amongst the biggest consumers of platinum.
Sentiment makes platinum a contrarian trade
Sentiment towards platinum has been negatively impacted by the positive sentiment of electric vehicles and the strong growth forecasts that markets are pricing in (as platinum is used more in conventional vehicle manufacturing). This saw platinum sentiment approaching excessive pessimism and speculators were extremely short. However, we see this as longer-term risk as conventional vehicle sales are still growing, making platinum a contrarian trade with strong upside potential.
Source: Sentimentrader, AMP Capital. As at January 2018.
Technicals confirm platinum was oversold
From a technical perspective, platinum exhibited oversold conditions and on a relative basis compared to other precious metals like gold and silver, platinum has been a significant underperformer suggesting there was room for catch-up.
Undervalued, unloved, and oversold
With the DAA process revealing platinum as an undervalued, unloved, and oversold investment opportunity, a 2%* allocation was made within ASX: DMKT. The position was closed at a profitable price after platinum rose by over 10% as the price returned above its long-term cost of production and sentiment went from excessive pessimism to excessive optimism.
Source: Bloomberg, AMP Capital. As at January 2018.
Platinum is an example of the breadth of DMKT’s investment opportunity set whereby a relatively small allocation can improve the portfolio's overall return and diversification.
To access this opportunity, simply trade ticker code DMKT on the ASX
Want to know more?
We recently hosted a webinar where Nader Naeimi unpacked ASX: DMKT, outlining how it works, how it’s performed in recent periods of volatility, and more. Watch the recording here
*2% of the DMKT portfolio as at October 2017
Important note: This article has been prepared by AMP Capital Investors Ltd (ABN 59 001 777 591, AFSL 232497) ("AMP Capital"). BetaShares Capital Ltd (ACN 139 566 868, AFSL 341181 ("BetaShares")) is the responsible entity and the issuer of units in the AMP CAPITAL DYNAMIC MARKETS FUND (HEDGE FUND) (the “Fund”). AMP Capital is the investment manager of the Fund and has been appointed by the responsible entity to provide investment management and associated services in respect of the Fund. Investors should consider the Product Disclosure Statements (PDS) for the Fund before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. Neither BetaShares, AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document.
Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this email, neither BetaShares nor AMP Capital makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This article has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this email, and seek professional advice, having regard to their objectives, financial situation and needs.