Bottom fishing on Commodity-related themes

After the recent days of price volatility, many investment experts and investors have suddenly turned to be very bearish towards commodity markets.  Besides, HK and Chinaequity markets have severely underperformed the US equity markets since early February. Despite the pessimism, we are quite positive towards some commodities and relevant listed companies.  The reason is very straight forward ------ Be greedy when people around you have become too bearish.

Global equity markets in general closed lower as some investors have started to take profit from the US equity markets.  The DJIA lost 0.56% to 14,537.1 while the UK-based FTSE 100 index slightly fell 0.01% to 6,243.7.  German DAX lost 0.39% to 7,473.7.

We prefer Petro China (857) to CNOOC (883)

Relatively speaking, we are more positive towards gold compared to industrial commodities such as crude oil after the recent commodity market crunch.  The reasons are very simple. Global economy may have chance to face slowdown risk in the year of 2013, thus limiting the demand growth for industry commodities.  However, inflation risk caused by excessive money supply (note: QEs in some developed countries and loose monetary policy in Chinahave created the problem of excessive liquidity) should buy gold price from 2-3 year perspective.  Besides, risks such as currency war and geopolitical risk in North Asia (note: caused by the North Korea missile incident) may imply higher demand for safe haven assets such as gold.  Gold price is around US$1,391 per ounce while NY crude oil is about US$87.2 per barrel.

In theory, upstream oil energy stocks such as CNOOC (883; HK$13.4) should benefit from potential oil price technical rebound.  Nevertheless, company risk associated with the Nexen acquisition may negatively affect the profit level in 2013 and 2014.  As such, we prefer PetroChina (857; HK$9.31), another state-owned oil energy company that has balanced exposure to upstream and downstream operations.

At HK$9.31, Petro China trades at FY12 P/E of 11.9x (EPS: HK$0.785), and valuation appears to be affordable after few months of share price correction.  The share price was HK$11.06 on January 31, 2013, and current share price has cumulatively corrected for around 16%.  Petro China may suit prudent investors who pursue less-risky stock choices.

Quality gold mining stocks with good speculative value

The speculation game of gold is very straight forward.  If gold price is not as bad as most people think of (note: many people have suddenly turned to be bearish recently), the safe haven asset is likely to rebound considerably in the coming quarters.

To leverage the potential speculation return, quality gold mining stocks may be sensible pick.  At HK$8.12, Zhaojin Mining trades at FY12 P/E of 9.9x (EPS: HK$0.820) and the stock should be extremely oversold after months of share price weakness.  Of course, such speculation game may not suit everybody and exposure of the share should not exceed 5% of total portfolio size.