As I begin typing this week’s column, I realise I may be marking the absolute top of the market. I have been intrigued — if not even tempted — by the stories of rapid and stupendous gains made on the back of non-traditional investments, and the thought of sharing them with you freaks out the value investor in me.
It is much safer to invest in high-quality companies, those with rising returns on marginal equity, long runways for growth, and/or those underappreciated by the market. The fact analysts tend to overestimate the near term, while underestimating the long term, is a truism any experienced investor will know well.
But sometimes we go off-piste, if only to experience the ability of alternative investments to keep the mind stimulated and curiosity alive.
The reason for my hesitation this time is that the following investment opportunities are less conventional than oil — which I picked last year — and they aren’t one of the three or four each decade that slaps you in the face.
As always, an appropriate amount of capital should be allocated based on one’s risk appetite and their financial circumstances and needs.
Ethereum
I recently wrote in this column about cryptocurrencies and I explained the merit in backing coins that facilitate a particular blockchain project.
Ethereum (ETH), is the second-largest cryptocurrency after bitcoin, representing over 15 per cent of the cryptocurrency market. ETH is a decentralised, open-source blockchain featuring smart contract functionality and most leading DeFi (decentralised finance) projects, such as applications in automated money markets, and NFT (non-fungible token) platforms have been built on its network.
NFTs have fascinating characteristics with the potential to permanently disrupt traditional proof-of-ownership repositories. The information storable on an NFT far exceeds that which can be written on a paper certificate of authenticity or a property title deed.
NFTs have only relatively recently begun to demonstrate to a much wider audience the potential for digital assets and simultaneously their disruptive potential.
Unsurprisingly, the ethereum platform (ERC-20) has become the largest platform on which other tokens are built on. Consequently, and as I discussed in my recent column, the currency that fuels these developments stands to benefit.
ETH has risen rapidly and now trades at $3398, up from $288 a year ago. Everything that goes up must come down and a crash in crypto markets should at least inspire the contrarian to investigate whether NFTs and other proof-of-ownership technology projects have long-term investment merit beyond the current speculative frenzy.
Rubber
The next opportunity is one the auto dealer from whom you have just ordered your new car doesn’t want to know about.
Already suffering from pandemic-induced plant shutdowns and a global semiconductor chip shortage, car dealers and manufacturers need a global rubber shortage like a fish needs a bicycle.
A car cannot run without tyres and a rubber shortage — reflected in the doubling of the price of rubber over the past year — poses a meaningful threat to new and existing road users.
Natural rubber is farmed from trees. Trees require seven years to mature and are reliant on suitable weather conditions.
Previously low rubber prices gave growers little inducement to plant trees and instead incentivised them to work existing trees harder. And before COVID hit, rubber trees in Thailand, Vietnam and Indonesia were affected by a leaf disease depleting their levels of supply, triggering China to stockpile.
With demand now returning, if not surging, the sphere of a rubber shortfall has emerged.
On the quarter ending in March, natural rubber rose almost 60 per cent, after touching a four-year high of ¥338 per kilogram at the end of February.
Investors looking to lithium as a way to invest in the inevitable tidal wave of electric vehicles might also consider the wisdom of investing in the raw material required for tyres.
Uranium
My final unconventional investment is much more controversial. When electric vehicles take off, petrol stations might suffer but their loss will be the electricity producers’ gain because demand for electricity is likely to put pressure on its supply and its price.
Global sales of electric vehicles grew from 110,000 in 2012 to 4.7 million in 2019 and are expected to grow to more than 127 million by 2030.
The demand for electricity could more than double over the next two decades, necessitating an increase in wind, solar and nuclear power plants.
According to the World Nuclear Association, if all the additional electricity demanded by electric vehicles were supplied by nuclear power, another 25 plants would require construction. Meanwhile uranium mining operations have been declining for years.
As a consequence of years of cutting operations, the annual global supply deficit of uranium is projected to average a total of 23 million pounds through to next year, or roughly 13 per cent of global uranium demand.
A uranium price rise seems inevitable.
Roger Montgomery is founder and chief investment officer at Montgomery Investment Management
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