In recent months, the relentless rise in the prices of commodities such as gold, coal, oil, and non-ferrous metals has reignited interest among investors in the elements of the periodic table when selecting stocksWhen cyclical stocks excel, however, investors often face a conundrum: the limited availability of funds specializing in cyclical sectors complicates the selection processThe cyclical sector is closely tied to macroeconomic trends, making it a multifaceted area with various subsectors and lengthy supply chains that can be daunting to decipher.

Moreover, many cyclical industries heavily rely on raw materials and building materials such as oil and petrochemicals, steel, and coalThese areas offer limited imaginative prospects for investorsA humorous analogy often floated in discussions about the stock market likens different sectors to personalities in a classroom: pharmaceuticals are the class president; consumer goods are the prom queen; technology, media, and telecommunications (TMT) are akin to rich kids, while cyclical stocks are habitually at the back of the class.

The challenge of trading cyclical stocks is substantial

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Prices can fluctuate wildly, and determining the turning points in industry cycles requires extensive research that many investors simply do not have the time or experience to undertakeConsequently, there are very few fund managers savvy in the realm of cyclical stocksStatistics from Haitong Securities reveal that as of 2023, public funds allocated only about 13% of their portfolios to cyclical configurations, a stark contrast to their heavier investments in sectors like electronics and pharmaceuticals.

Despite these challenges in what may appear to be a less glamorous field, there are still dedicated fund managers honing their craftOne such emerging figure is Ye Peipei, affectionately dubbed a "new player" in the cyclical fund management spaceYe may not be widely recognized within the public fund industry, but her 16 years of experience and her unique pathway as one of the few ex-sell-side cyclical researchers lend her significant credibility in her current role.

Ye's current management of three funds shows promising performance

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Her prior positions included serving as the head of the investment department at Shenwan Hongyuan Research Institute, where she also acted as chief analyst, and investing manager at Pacific Asset ManagementJoining China Europe Capital in December 2021, she initially managed specialized accounts that catered to diverse clients, such as insurance, banks, and securities firmsHer tracked performance has consistently outperformed the average equity mixed fund index, transitioning to fund management at the end of 2023.

Ye Peipei's research background at Shenwan Hongyuan focused mainly on the cyclical sectors, including non-ferrous metalsBetween 2007 and 2015, she witnessed the dramatic rise of certain commodities, achieving astonishing price increases a mere six months apart, followed by protracted periods of recession and recalibration lasting upwards of seven to eight yearsThis deep exposure has left her with a profound respect for the cyclical market's intricacies.

After joining Pacific Asset Management in 2015, Ye directed her research towards various areas, including small-cap stocks, pharmaceuticals, non-ferrous metals, and carbon neutrality

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During this journey, she developed a solid methodology for pricing different asset classes while fostering a philosophy revolving around long-term and value investingInvestments associated with insurance typically span five to ten years, often necessitating significant early buys of leading market participantsThis situation calls for fund managers to possess unique attributes such as contrarian thinking and deep valuation skills.

Ye Peipei has successfully tailored a strategy to fit her characteristic style of cyclical value investingShe seeks to identify advantageous sectors based on industry trends, targeting segments with high win rates and favorable odds for contrarian positioningShe remains staunchly focused on investing in core competitive alpha companies that can leverage themselves and exploit investment opportunities for superior returnsFrom her perspective, quality companies that navigate through rapid industrial growth often engage in increased capital expenditures and R&D investments to enhance market share and competitive products, setting them up for renewed growth phases as the market matures.

For instance, her portfolio comprises energy stocks, largely dominated by industry leaders who have excelled during the recent resource market upturn, as evidenced by impressive growth in the first quarter of 2024. However, Ye is prudent in her approach, selectively holding stocks in industries recognized for upward trends but where there may exist a mismatch in perception

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Primarily, she remains wary of those sectors and companies residing at cyclical peaks or in discernible downturn phases.

Although Ye Peipei’s three current funds focus predominantly on resource commodities, each employs slightly differing investment strategies and weightsThe China Europe Capital fund emphasizes global macroeconomic assessments, concentrating on resources benefiting from the reconstruction of global supply chains and the re-industrialization of manufacturingCore investments are largely directed towards upstream resources like copper, gold, oil, aluminum, and coal, while supplementary allocations provide exposure to manufacturing ventures overseas.

The China Europe Optimum Industry and China Europe Jia Yi one-year holding funds are more aligned with value investing within the cyclical framework, emphasizing upstream resources and international manufacturing opportunities in the consumer goods sector, such as appliance, automotive, and energy sectors, while also allocating to stable, high-dividend utilities like electricity and gas.

As we harbor conversations around the vast opportunities presented by the ongoing commodities boom, insights from firms such as Zheshang Securities highlight a comprehensive review of the substantial trends in commodities since 2005. This analysis reveals that sectors like basic chemicals, steel, and non-ferrous metals have undergone considerable fluctuations, consistently resulting in excess returns during periods of commodity price surges.

The dual nature of commodities, possessing both economic and financial attributes, is evident in the recent rally where precious metals like gold have surged owing to the depreciating value of the dollar

Similarly, industrial metals such as copper have seen resurgence driven by global supply and demand improvements amid low average stock levels, gravitating towards heightened requests.

The analysis also observes a recovery in the PPI year-on-year figures beginning in July 2023 in both China and the United States, signaling a transition where proactive inventory replenishments are anticipated as cycles progress, particularly in response to demand-side improvements.

Furthermore, complications arise from the tempered capital expenditure among Chinese resource companies and an insufficiency of newly added overseas production capacities in certain categories, suggesting tight supply conditionsAmidst this climate, optimism surrounding the current cycle retains an upward momentum.

With so much uncertainty surrounding this market, navigating the rhythm of cycles can indeed be harrowing