The FTSE 100’s commodity giants received further rocket fuel in mid-week trade, the stunning victory of Donald Trump in the incendiary US Presidential battle driving hopes that the winner’s infrastructure plans could propel metal demand to the stars.
The likes of BHP Billiton (LSE: BLT) and Glencore (LSE: GLEN) have already benefitted from solid safe-haven buying following Britain’s decision to exit the European Union in June, with investors seeking stocks with terrific international exposure to mitigate the prospect of worsening economic conditions at home.
Fresh market buyer appetite on Wednesday has seen these raw materials mammoths surge 5% and 7% respectively. And these further gains mean that BHP Billiton and Glencore have enjoyed share price rises of 76% and 199% since the turn of 2016.
U-S-Eh?
As I have alluded to, commodity values leapt on Wednesday on hopes that Trump is about to unveil a massive update programme for America’s crumbling roads, railways and other public projects.
The Republican candidate’s vow to spend “at least double” the $275m that election rival Hillary Clinton had earmarked for infrastructure spend during the next five years was a big vote-winner, and the electorate will be expecting their President-elect to deliver on this.
And House of Representatives minority leader Nancy Pelosi has raised the possibility of such a plan being realised, telling Trump on Wednesday that “we can work together to quickly pass a robust infrastructure jobs bill.”
These hopes propelled bellwether metal copper to its highest since mid-2015 above $5,440 per tonne. And the red metal wasn’t the only beneficiary with many other base metals also striking multi-month tops following the election.
Dicey demand
While sounding good on TV, the chances of the US actually embarking on a half-a-trillion-dollar building plan are far from a sure thing. Indeed, the economic reality is that the US may not be able to afford to splash out on upgrading its public works.
Aside from what happens across the Atlantic, the extent of Chinese commodity demand in the years ahead also remains a major concern. The country accounts for 40% of copper demand, for instance. But slowing exports of finished goods suggest that metal purchases from China could be about to turn lower, particularly as stockpiles in the country are already quite plentiful.
Set to slump?
With the supply of many commodities also set to rise on the back of major mine expansions, the route back to splendid earnings growth for Glencore and BHP Billiton is littered with obstacles. However, I believe that the share prices of neither company reflect these risks at present.
For 2017 Glencore deals on a P/E ratio of 39.6 times, while BHP Billiton deals on an earnings multiple of 22 times. Both these figures sail above the benchmark of 10 times indicative of high-risk stocks, not to mention the broader Footsie forward average of 15 times.
I reckon now is the perfect time for investors to take profits on the commodities sector.
