Pactum Asset Management: Are Agricultural Commodities Overvalued?

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As the US witnesses a near unprecedented drought situation, agricultural commodities have soared in the last few weeks. Is there a possibility for further upsides in the agricultural commodities space?

Simon Wainwright of Pactum Asset Management thinks there’s limited upside potential for agricultural commodities now since stock prices of many companies have jumped more 40 percent in the last 46 months.

However, fertilizer companies from Europe and the US have reported strong demand and input costs coming down significantly due to falling prices of oil and natural gas. That being said, the stocks in this segment have moved nearly 30 percent in the last two months, which makes them overvalued and it’s advisable to pick them up by the end of the year.

Agricultural commodities, however, still remain a bright spot as latest reports suggest 40 percent of the produce is extremely poor, which is unprecedented in US history. So grains like corn hold some potential for further upside though the easy money have been already been made and investor discretion is advised.

Moving to the base metals sector, Simon said the entire segment is being driven by the macro-outlook on China. Since there are two camps on the Chinese growth story, the investment approach will depend on which camp you belong to. If you believe China-linked assets are fully discounted and are trading at fair value, you may go ahead and invest in base-metal sector. However, if you believe that a Chinese slowdown remains a distinct possibility till the end of 2013, you need to be extremely careful.

A better way to play this area is via the broad based commodity ETF DBC, which has just broken above its 39-week moving average last Friday. Be aware that this sector can very volatile, so you need to use my recommended sell stop discipline to limit downside risk. For sector ETFs like this on, I suggest 10%.

Moving to precious metals since yields on govt. securities are falling, gold looks like a safe bet to Simon. The three major crises hanging overhead of the global economy – a significant Chinese slowdown, the US fiscal cliff and a potential Euro breakup increases the safe-haven allure of gold.

A lot of people may think that gold has done badly this year, but the yellow metal has remained near flat thus far. We had a nice run up in the first half, but we are off those highs and current prices are close to where they started this year.

Gold equities look extremely attractive now, especially some of the mid-cap US and Canadian producers. You can watch the video here.

Disclosure: No holdings

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