Practical analysis for investment professionals
01 October 2015

Weekend Reads for Global Investors: Is Glencore the Next Lehman Brothers?

Posted In: Weekend Reads

If you did not know what Glencore was all about, chances are that you’ve found out by now.

Glencore, a large commodities trading and mining company, made headlines all around the world this week as its stock price tanked. Some analysts went so far as to call it the next Lehman Brothers.

As it turns out, there is much that we can learn about investing from the Glencore story. I think the most important takeaway for investors is probably that macro matters. For too long, too many otherwise intelligent portfolio managers have claimed to be completely “bottom-up” investors, i.e., they would only study the financials and strategic positions of specific companies. Although this is probably feasible for small-cap investors, I’ve always wondered why these managers, particularly those who invest in large-cap companies, would not at least spend some time thinking about what macroeconomic developments could do to the companies on their radar screens.

Glencore turns out to be a car wreck that portfolio managers with an eye on macro could have seen from a mile away. We have been writing in this column about the slowdown in China’s economic growth and how it affected commodity prices as well as the currencies of countries that rely on commodities exports, Australia and Canada among them. Applying that macro picture to the stock markets, the weakness in commodities traders and mining and shipping companies witnessed this week becomes fairly straightforward and easy to understand.

Another lesson for less sophisticated investors is that increasing leverage has its risks. The Modigliani-Miller Theorem states that in an ideal world whether a firm gets financing through debt or equity makes no difference. Since debt has a much lower cost compared to equities, naive investors tend to think using debt is a shortcut to higher profitability. Glencore has once again proven that leverage is not risk-free. Its precarious debt position, coupled with the unfavorable macro development, is what got Glencore into trouble in the first place. Instead of taking home a little less profit, the equity investors’ risky bet now could potentially wipe out all their investments.

The Glencore case also showcases why value investing is a tough discipline to master. Cyclical companies are a favorite of traditional value investors. As many value investors have pointed out though, value investing requires considerable patience. They know that they are often early. And when they are, they’ll have to spend months and years afterwards wondering if they made the right call. And that, no doubt, is what many investors in Glencore and other commodities-related companies are going through right now.

Below are the links to the Glencore story and some of the other readings that I have come across this week. Enjoy the weekend and happy reading!



Emerging Markets

The Soft Side of Business

And Now for Some Readings Truly for the Weekend . . .

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, senior director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, Multi-Asset Strategies: The Future of Investment Management and AI Pioneers in Investment management. He is also a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

1 thought on “Weekend Reads for Global Investors: Is Glencore the Next Lehman Brothers?”

  1. This article makes several valid points about the nature of commodities investing and its inherent risks. I’ve worked in the field of finance for many years. Currently I work with a firm that provides working capital to small businesses across the US.

    I agree that a macroeconomic view is especially important in this case. In addition to the ramifications of the slowdown in China’s market, I think that an additional factor is even more important.

    Continuing manipulation of the gold and silver market that is occurring as countries are striving to control their currencies value and manage their debt, is a major factor in Glencore’s current condition. And that is always beyond an individual investors control and many times overlooked when assessing profit potential vs risk.

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