Exchange Traded Funds (ETFS)

The 5 reasons we invested in platinum

By Sam Amora
Assistant Portfolio Manager, Investment Strategy and Dynamic Markets team Sydney, Australia

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
 

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. 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. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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