So far, all of the major trends we’ve discussed have revolved around expanding consumer demand, as a result of population growth and changes in income dynamics. However, this kind of growth has some implications for growth of the economy as a whole. Specifically, as consumer spending begins to push the markets back into a period of growth, we’ll see commodity companies begin to increase production. This provides us with a couple of investment opportunities, with varying degrees of respect risk.
The most obvious investment opportunity for an economy on the upswing is to invest in the producers themselves. As consumers buy more, the suppliers will produce more, and require more raw materials for production and shipping. Electronics companies, for example, require a great deal of petroleum product to build their goods. Alternatively, copper has been known to be a strong indicator of economic growth, because of how it acts as a base material for so many consumer goods.
Unfortunately, the risks for this sort of investment are twofold. Firstly, it assumes that you have accurately predicted the rebound in demand. If it turns out that producers do not actually increase their supply, or that demand does not actually increase to the point of creating a rebound, you won’t see very good returns. For that reason, we’d want to try and tweak this strategy to better fit safer personal portfolio.
As I’ve mentioned before, one of the best ways to reduce your risk exposure to a position is by switching security classes. For example, instead of taking on a position in an oil company, take on the equivalent bonds for a yield. It provides better security, and will still create a capital gains return in the event that your predictions on the market should become valid. Effectively, you’re securing your returns through the bond yield, and obtaining an upside benefit from the price benefits that come from the company increasing its ability to pay off the debt.
Alternatively, an investor could take a little bit of risk off the table by investing instead in commodity infrastructure. For example, increased oil pipeline usage improves the royalties received by Midstreaming companies, and may result in increased yield or returns.
The end result?
A safer, royalty-based income, as opposed to a risky exploration return. However, you still gain access to the benefits associated with increased volume that is coming from the producers. This means that the investment is a tamed down play on the increased demand, which is secured by a high mid-streamer’s yield.
