Commodities and commodity stocks are ideal for diversification because they’re generally uncorrelated with the wider market. Indeed, during the financial crisis, as stock markets around the world plunged, commodities and commodity stocks rallied thanks to robust demand for raw materials from emerging markets.
So, if you’re looking for an asset class to protect yourself from Donald Trump’s presidency, commodity stocks could be the best option. And when it comes to selecting commodity companies, bigger is usually better.
Bigger is better
BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) have proven over the past three years or so that their size is their greatest advantage. While smaller producers have struggled with low commodity prices, and many have collapsed under mountains of debt and high costs, BHP and Rio have pushed ahead. Both companies have cut costs to the bone, paid down debt and continued to expand despite the hostile operating environment.
For example, for the year ending 30 June 2016 BHP reported underlying EBITDA of $12.3bn and an underlying EBITDA margin of 41% despite the fact that weaker commodity prices lopped some $10.7bn off earnings.
A handsome EBITDA margin of 41% in a week environment is a result of the company’s cost-cutting efforts.
After slashing costs by $437m during the last fiscal year, the company is on track to generate $2.2bn of productivity gains by the end of the 2017 financial year. At the same time, BHP spent $6.4bn on capital projects and exploration last year. When all was said and done, for the year ending 30 June 2016 the company generated free cash flow of $3.4bn.
Rio also made a healthy amount of cash during its half-year to 30 June. Cash generated from operating activities for the period was $3.2bn against underlying earnings of $1.6bn. With money to spare, after paying a dividend $1.9bn in April the company paid off nearly $1bn of debt, reducing its total net debt by 6% from year-end 2015.
Infrastructure play
As well as being uncorrelated to the wider market, Rio and BHP could be good investments in a Trump world if the President-elect follows through on his infrastructure plan.
Trump (along with other leaders around the world) has promised to ramp up US infrastructure spending as part of his plan to kick start America’s economic growth. An infrastructure push will increase the demand for construction materials and commodities such as iron ore. BHP and Rio will almost certainly benefit from this growing demand.
So overall, if you’re looking for investments to protect your portfolio from Donald Trump, BHP and Rio may tick all the boxes. These companies will benefit if Trump’s infrastructure plan comes to fruition and they tend to move in the opposite direction to the rest of the equity market.