ETFs

An Early Buy in Anticipation of A Bounce Back

During periods of volatility such as we are currently experiencing, investors with a contrarian bent like me start thinking about what to buy when things settle down. There are two ways of approaching that: either you look at the hardest hit stocks on the basis that they have further to bounce, or those that have held up well on the basis that they would have done a lot better were it not for the general panic.

In this case, I favor the former approach and, in particular, the hardest hit sector of all: agriculture.

If you have read the last few days of Market Musings you will know that I believe that stocks could well decline further before all is said and done, but one thing that is certain is that it will end at some point. The nature and causes of this bout of selling means that that time will probably come when there is good news about China/US trade, if not an actual deal.

We have already seen that the hardest hit industry in this dispute is agriculture, but it is also the one where concessions have been made in the past. There is therefore a good chance that any easing will quickly benefit the sector.

That makes it a viable rebound play, but the real opportunity here is for buying long-term investments at a discount. The world’s population continues to grow, and while economic conditions and other concerns can lead to fluctuations in demand for some things, we all need to eat.

The problems with buying ag stocks right now are twofold. The first is that things could get worse before they get better. The second is that the long, drawn out nature of this trade war is doing damage to some American companies in the sector that could have lasting effects, but it is hard to know at this point who will bounce back quickly and who will not.

Regarding the first issue, one of the advantages of agriculture is that things in that sector really can’t get much worse. There are lots of examples of the tariffs as currently constituted effectively closing the Chinese market to U.S. farmers and, once closed, they can’t become “more closed.” The bad news and worst-case scenario are, therefore, very nearly fully priced in at these levels.

The second concern is easy enough to address. When an analysis suggests a sector or industry but the problems that have caused the undervaluation make it difficult to drill down any further to a specific stock, buying an industry ETF usually makes sense. That leads us to something like the MSCI Global Agricultural Producers ETF (VEGI).

VEGI ETF 1 ytd chart

This fund has the advantage of being global, allowing for the full long-term growth potential in food production, but, as you can see from the chart, it has been following the fortunes of the trade talks over the last few months. The current price of around $26 looks like a good entry point, being close to the low formed in May and close enough to the multi-year low of $24.78 to allow for stop losses based on that level.

At the moment, a solution to the trade dispute looks a long way off, but that is what makes it a good time to start looking for things to buy that have been affected by it. There is a limit to how far things can realistically be expected to go, and the Trump administration has shown a tendency to release positive comments when the market gets hit hard.

Both of those and the fact that all the bad news has been accounted for make it likely that the sector will bounce before too long. That bounce will give a cushion for longer term holdings, so buying now looms like a good move, even if there is no quick solution to the trade war.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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