These are the 2 best UK shares for me to buy in this commodity supercycle

There’s increasing consensus that we may be in a commodity supercycle. If that’s the case, Manika Premsingh thinks these are the two best shares to buy now. 

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Commodity prices are on the roll. Brent crude’s price crossed $60 a barrel recently. Industrial metals like iron ore and copper have been on a tear over the past year too. No wonder then, that there’s a growing view that a new commodities’ supercycle could be here. If it is, mining stocks could be among the best UK shares to buy now. 

What’s driving the commodity supercycle?

But first, what’s driving the commodity supercycle?

Investment bank JP Morgan points to the return to growth, end of the trade war, soft monetary policies, and government spending as drivers. This view reinforces Goldman Sachs’ forecast for a bull market in commodities in 2021, driven by the social crisis that is Covid-19

As per JP Morgan, this could last for many years. Signs on the ground may already be visible. This week alone, mining results are more positive than not, indicating gains from the commodities bull run. 

Best UK shares to buy now

This only adds to my belief that miners are good stocks to buy anyway, a point I’ve long made. There are four reasons for this. 

  1. In general, a typical miner’s share price chart — like that of Rio Tinto or Anglo American — has an upward sloping graph over the past five or six years. You can’t rely on past performance to predict future performance, but this does give me confidence that my capital will likely grow overtime.
  2. Miners usually pay dividends too. FTSE 100 miner Glencore had paused on dividend payouts last year, but has resumed them now.
  3. Typically, they are also largely financially healthy. To me this is the most important feature to consider when buying a stock for the long term.
  4. Their share prices are still affordable, with price-to-earnings (P/E) ratios hovering around the mid-teens. This makes them more competitive relative to FTSE 100 defensives like National Grid or AstraZeneca

The mining sector alone gives much choice to investors if we consider the FTSE 100 constituents. This brings up the question, among mining stocks, which are the best UK shares to buy now?

Here are three options that could work well, I think:

#1. Rio Tinto: impressive earnings

Rio Tinto’s annual results released earlier today showed earnings at a 10-year high. The world’s biggest iron ore producer also has a dividend yield of 4.75% and its share price pretty much breezed through 2020. And now we have a possible commodity supercycle underway.

#2. BHP: rising dividends

The multi-commodity miner’s results earlier this week were great too. Its earnings rose to the highest for the first-half in seven years. Its share price has been on the upswing since even before the market rally started in November last year. It too pays a dividend, with a yield of 3.2%. 

Risks to consider

Mining isn’t without its risks though. As a cyclical sector, at some point, it will see a softening in demand and prices. Moreover, the supercycle theory may not play out over time if the fiscal stimulus fizzles out or China’s domestic metals production ramps up significantly. 

For now, however, the odds seem to be stacked in favour of miners. I think they are among the best UK shares I can buy now. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh owns shares of AstraZeneca and Glencore. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »