Basic Materials Stocks are Undervalued, says Miton

Miton multi-asset investor David Jane explains why commodity stocks, South African equities and agriculture assets are good value

Emma Wall 13 March, 2018 | 7:51AM



Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and joining me today to give his three picks for growth is David Jane, Manager of the Miton Cautious Multi Asset Fund.

Hi David.

David Jane: Good morning.

Wall: So what’s the first pick you'd like to highlight today?

Jane: Let’s talk about materials, basic materials and basic industries. This is an area that has broadly been out of fashion now for perhaps 30 years in the era of low growth, low inflation. These very capitally intensive industries are relatively unpopular. If we believe we are in a strongly growing economy, with rising inflation, if you've got a big block of embedded assets, perhaps a paper mill or a chemicals plant or so on and so forth, the value of those hard assets is appreciating as inflation comes through.

The demand for your products is growing as growth comes through and the returns these companies can earn which has historically been very low are starting now to go up. So we find that whole broad basic industries area very attractive at the moment.

Wall: And there has been a lot of talk about basic industries recently about steel, about commodities. Are these concerns for you or do they act in some way as tailwinds?

Jane: Absolutely, in many ways they are opportunities. If you are looking at hard steel mills in the States say for example. Clearly those have appreciated very, very strongly and broadly we don’t think tariffs is going to be a big issue long term, but clearly in the short term it's given us a bit of fillip.

Wall: And what's the second pick?

Jane: Let's talk about South Africa. It's another area that’s been very out of favour for very long period of time, broadly because obviously the government there was very poor and very corrupt. We've now introduced at least a hope, if not realistic prospect of serious reform in South Africa, but you are looking at actually what is probably the strongest economy in Africa with a lot of potentially strong aspects to it.

You've got a growing potential consumer base so on and so forth. So the combination of reform, improving government balance, and a very strong consumer sector makes South Africa again investible and again relatively cheap.

Wall: How diverse is that as a stock market? Because other than Tiger Brands I don’t think I can name a South African company that isn’t related in some way to the mining industry.

Jane: However, it's actually – and that’s not the area we bought, we own that basic materials sector – but actually, if you look at South Africa you've got a financial sector which is relatively large, but more attractive to us is very much the consumer related sector.

So, you've got a strong retail sector generally broadly operating across the whole of Africa, a strong media sector and so on and so forth. It's a much deeper economy, it's just been so out of favour and so unlooked at now for a decade, that people forget this is the biggest and most successful economy in all of Africa.

Wall: And what's the third and final pick?

Jane: Let's talk about agriculture today. Agriculture is a long-term theme that we found attractive for a very long period of time. Broadly because the basic ability of the planet to produce food doesn’t change because there is only single quantum of farmland. But of course, the demand for food with a growing population and increasingly wealthy growing population is growing much faster.

So, companies that are able to either improve the productivity of agricultural land or are to benefit from rising agricultural products prices. Which is worth talking a little bit about actually. Because if you look at most basic materials, their prices have been increasing now for four, five years as the economy has gone well. The big laggard is soft commodities, broadly agricultural products, who are now starting to see some improvement in pricing.

That of course feeds through the demand for basic agricultural supplies such as fertiliser, but also in terms of agricultural machinery. And of course one of the more attractive areas is agricultural technology, those technologies that can really improve productivity whether it's in sort of very directed watering systems or seeds or so on and so forth.

Wall: David, thank you very much.

Jane: Absolute pleasure.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
LF Miton Cautious Multi Asset B Acc250.06 GBP-0.11

About Author

Emma Wall

Emma Wall  is Senior International Editor for Morningstar