Jeremy Grantham’s GMO says it’s not too late to buy commodity stocks

  • According to Jeremy Grantham’s GMO, it’s not too late for investors to buy energy stocks, even after commodity prices have risen rapidly.
  • GMO highlighted attractive valuations and favorable supply-demand dynamics, suggesting that commodity stocks have a lot of upside ahead.
  • “The clean energy transition will take decades to complete, and in fact it will be a major driver of commodity demand,” GMO said.

Given the impressive year-and-a-half-long rally in energy stocks, most investors may think it’s “too late” to buy energy stocks, which have significantly outperformed relative to the broader market.

But Jeremy Grantham’s GMO lays out why now is still a good time to add to energy and other commodity-related stocks, even as energy picks have outperformed the S&P 500 since early 2021 The index exceeds 120 percentage points.

GMO’s Lucas White explained that it all comes down to supply and demand, and even accounting for the continued transition to clean energy, there is not enough supply of hard natural resources to keep up with demand that will continue to be very strong. its first quarter letter.

“On the demand side, our global population is rapidly approaching 8 billion and is well above that. What’s more, a significant portion of the global population lives in developing countries, which will continue to go through stages of economic development, especially several It’s been commodity-intensive for a decade,” explains White.

Plus most of the resource production in Russia Virtually isolated from global supply chains, This means that prices for many commodities may continue to rise. Even the transition to a clean energy world will not end the world’s need for natural resources, as copper, lithium, nickel and cobalt are all essential to power the clean energy grid of the future.

“Population growth, economic development and decarbonization all but guarantee a substantial, potentially explosive increase in commodity demand,” White concluded.

But while demand for commodities will be incredible, supply won’t be able to catch up, as many oil companies have experienced incredibly low commodity prices for so long and from ESG and divestment circles.

This period essentially resulted in a decade of lost energy stocks and oil companies opting for profit over growth, essentially a self-reinforcing cycle. These profits are only higher if they prevent reinvestment, which would result in a persistent shortage of supply, which would lead to higher prices, which translates into more profits.

Capital spending in the resources industry has fallen to a 15-year low of about $150 billion, according to GMO.

“Fossil fuel prices could remain high even if we eventually displace demand if production investment is constrained [with clean energy]. On the most recent quarterly earnings call, BP CEO Bernard Rooney took a page from my book and said roughly the same thing: ‘…you can see a Oil prices remain high despite an accelerating energy transition due to a world of lack of investment. , much higher,” White said.

Against the backdrop of encouraging supply and demand for energy stocks, investors are getting a sweeter deal for energy stocks given current valuations, the report said. Resource companies are still trading at a 60% discount relative to the S&P 500, even after their massive rally.

“The market simply isn’t valuing resource companies reasonably, given any reasonable base case for how the world might play out,” White said.

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