A Long Idea From One Of Wall Street’s Biggest Bears

By Russell Clark, author of the Capital Flows and Asset Markets substack, and former CIO of the (very bearish) Horseman Global hedge fund.

In previous posts, I have tried to talk about how I used to manage money using a 3M process – Macro, Micro and Market. In essence I was looking for a macro change, that was supported by underlying industry data (micro) and confirmed by market trends, particularly technicals. The biggest macro trend I paid attention to was currency, which I had seen be the least understood factor in investing in my career. This stopped working in 2016, with Brexit, China and Trump, making politics far more important than macro. It took me a long time to accept that politics is more important than macro, but now that it has, my investing process is improving. I have had to rename it 4M – with the additional M is motivation, which is another way of saying politics. Paid subscribers will be aware of the ideas I have already pitched.

On the long side, I like Occidental for its commodity exposure and long term option on Direct Air Capture technology. I also like Japanese banks as an aggressive inflation trade. On the short side, I still like TLT, McDonalds, and residential REITS. All of this ideas are driven by the view that inflation is political, and the politics is now towards raising real wages. This means you have inflation, AND, tight financial conditions to protect those wage increase.

One of the ideas I have been toying with has been driven by politics, or the Motivation (the first M). One of the key ideas is that rising wages tends to push up the price of food. In a world of rising wages, food prices should rise.

This surge in food inflation is driven by China getting wealthy, more than anything else. The success of China in driving wages higher relative to other Asian nations that industrialized earlier is truly staggering. In a pro-capital world, China would have been expected to devalue to regain competitiveness, but China has obviously chosen to promote higher wages. When economist talk about China exporting inflation, what they mean is that Chinese policy has successfully raised wages – and in stark contrast to the experience of other Asian nations.

The combination of rising food prices makes me like food related companies, particularly companies that own or control farm land. Russia’s invasion of Ukraine also made me like the look of agricultural commodities that Ukraine has a large market share of exports – namely sunflower oil. In the traded vegetable oil market, palm oil dominates, with sunflower oil and soybean oil following.

Vegetable oil imports is one commodity that India imports more than China, making its demand outlook more robust than industrial commodities.

As it happens, supply of sunflower oil was better than expected, and inventory of crude palm oil has been larger than expected. This had lead palm oil to trade at a discount to soy.

Crude palm oil production and exports are dominated by two countries, Indonesia and Malaysia. The largest plantation owner is Singapore listed Wilmar International.

There are two things that attract me to Wilmar. Firstly, when they export palm oil to both China and India, they have built a local brand of vegetable oil as a consumer business. This has a much higher value than the plantation business, which they have attempted to monetize by listing a 10% stake in their Chinese consumer business in Shanghai. The value of their stake in Kerry Arwana has consistently been higher than Wilmar’s market cap.

The other thing that gets me very excited about Wilmar is that they have begun to expand into Africa. Still small, but this is much large than any other listed crude palm operators in Arica. Nigeria is now a a larger consumer of palm oil than the US, and has been growing rapidly. Palm oil originated in West Africa, before being introduced to Malaysia and Indonesia, so offers an attractive way to play growing African consumption.

Wilmar has a track record of building good consumer businesses, even in notoriously difficult markets like China and India.

Wilmar trades below book value with a 4% dividend yield. Why so cheap? I can give a lot of reasons, ranging from claims that palm oil cultivation destroys the environment, to the fact that other Singaporean commodity trading stocks, Noble and Olam ended up in financial trouble, and delisted. Against that, US listed trader, Archer Daniels Midland owns 25% of Wilmar. Wilmar faces the same headwinds of rising interest rates, but a cheap valuation with a long dated call option on African consumption sounds pretty good to me. Full discloser – I have a long position.