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.
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.
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.
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
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