How to Balance Risk After Stock Market Hits New Highs? Value of Commodity Allocation Gains Market Attention

This year, after the stock market hit new highs, concerns about overheating in semiconductor trading have been growing. In this issue, Street Investment Trust's fund manager Lin Yingguang points out that investors should not only focus on pursuing high returns but also emphasize asset allocation and risk management. Historical data shows that commodities have relatively low correlation with the stock market. Therefore, when the stock market is at a high level, investors can consider adjusting their profitable stock positions and shifting towards commodity assets. By diversifying their portfolio, they can reduce overall volatility and enhance stability. Experts provide a comprehensive analysis.

Semiconductor trading becomes crowded; commodities diversify stock market concentration risk

Global stock markets have repeatedly hit historical highs, with semiconductors and artificial intelligence themes becoming the focus of market capital. However, the concentration of capital has also increased market volatility risks. Lin Yingguang points out that the May survey by the American Bank of global fund managers shows that 73% of fund managers believe semiconductors are the most crowded trade in the current market, far higher than 24% in April. This reflects that capital has rapidly flowed into a few hot themes in a short period, which may intensify market fluctuations and increase the difficulty for investors to maintain stable returns.

Facing the increased concentration of the stock market, Lin Yingguang suggests that investment portfolios can appropriately include commodities to diversify risks through the lower correlation between different assets. From historical data, the correlation coefficient between Taiwan stocks and the Nasdaq index is approximately 0.7. Once U.S. tech stocks experience a correction, Taiwan stocks usually cannot escape the impact. In contrast, metals, crude oil, and other commodities have a correlation coefficient with Taiwan stocks of approximately 0.2 to 0.5, while agricultural products are only about 0.1, making their trends less likely to be affected by the stock market, which helps reduce the overall volatility of the investment portfolio.

He cites the example of international large investment institutions, pointing out that the investment portfolio managed by Ray Dalio, the founder of Bridgewater Fund, usually allocates a certain proportion to gold and commodities. By diversifying assets, risks are dispersed, and more stable long-term performance is pursued. Therefore, when the stock market reaches a relatively high level, investors can consider adjusting their profitable stock positions and shifting towards commodities with long-term themes. While seizing investment opportunities, the overall defensive strength of the asset allocation is also enhanced.

AI infrastructure boosts demand; copper supply bottlenecks support long-term trends

In the commodity market, Lin Yingguang is most optimistic about the long-term development potential of copper. With the rapid development of artificial intelligence, the global acceleration of AI data center construction has also driven the expansion of power infrastructure. Copper, with its excellent conductivity and cost-effectiveness, plays an indispensable role in long-distance power transmission, power grid upgrades, and the transformation of renewable energy. This is not just a short-term theme for three or five years, but a structural trend that may continue for ten or twenty years, which is expected to continuously support copper demand and prices.

Regarding the view that silicon photonics and optical communications may lead to "light in, copper out," Lin Yingguang believes that this view is only half correct. Optical fiber is mainly made of micrometer-level glass fiber, which excels in high-speed data transmission but cannot transmit electricity. Therefore, while it can replace some of copper's data transmission functions, it cannot shake copper's key position in the power system. In addition, the heat dissipation needs generated by high-speed computing of AI servers will also drive the use of copper materials.

He believes that the future market is more likely to form a "light and copper co-existence" pattern, with light and copper dividing functions according to different needs, jointly supporting the development of AI infrastructure: long-distance, high-speed transmission using optical fiber, and short-distance connections, power supply, and heat dissipation systems still relying on copper.

In contrast to the rapid growth in demand, the supply side of copper faces long-term bottlenecks. Lin Yingguang points out that new copper mines, from exploration, environmental impact assessment, community communication to formal mining, require at least 15 to 20 years, far behind the average 18 months needed to complete the construction of an AI data center.

Moreover, many major copper mines around the world have been mined for many years, with continuously declining ore quality and copper content. At the same time, the treatment and refining charges (TC/RC) reflecting the supply and demand relationship between mines and smelters are also continuously declining, even turning negative, indicating a significant shortage of copper mine raw materials. In addition, about 50% of the world's copper refining capacity is concentrated in China, and the United States has raised import tariffs on key metals, making various countries more aware of the strategic position of copper, also pushing up the market's demand for early stockpiling and resource acquisition.

Lin Yingguang suggests that investors can pay attention to the fund flows of copper-related ETFs, copper inventory levels on the London Metal Exchange (LME), New York Commodity Exchange (COMEX), and Shanghai Futures Exchange (SHFE), as well as changes in copper price spreads between LME and COMEX, as important indicators for judging copper price trends.

Price approaches production cost; soybeans may see a bottom reversal

In terms of agricultural products, Lin Yingguang is optimistic about the potential for a bottom reversal in soybeans. He points out that soybeans are mainly used for food and feed, with relatively stable overall demand. Price fluctuations are mostly due to supply-side factors, including drought, floods, and other extreme weather, as well as changes in production volumes and international trade policies of major producing countries.

In recent years, soybean supply from South America has increased, and China's procurement focus has shifted to Brazil, putting continuous pressure on U.S. soybean prices. Currently, soybean prices are around $11.9 per bushel, gradually approaching the production cost of approximately $11.16. When prices approach or fall below the cost, farmers' willingness to expand planting will be curbed, and some farmland may be converted to other crops, solar energy facilities, or industrial uses, thereby gradually curbing supply and providing a bottom support for prices.

From a technical perspective, soybean prices have formed a W-bottom pattern and have returned above the neckline, indicating that the trend is gradually strengthening. Lin Yingguang believes that if a key catalyst appears in the future, such as an improvement in Sino-U.S. trade relations, China's expansion of U.S. soybean purchases, or large-scale drought in North America, or severe floods in South America, leading to reduced production in major producing areas, it may further change the supply-demand structure and drive soybean prices to a more significant upward trend.

Geopolitics dominates oil trends; range trading strategy is advisable

Regarding the oil market, Lin Yingguang believes that summer travel, high-temperature electricity use, and manufacturing activities may support demand, but the increase is relatively limited. The oil price trend in the second half of the year will still mainly depend on geopolitics and supply changes.

He points out that although OPEC+ continues to increase production, the escalation of the U.S.-Iran conflict has increased the risk of energy transportation chokepoints such as the Strait of Hormuz, and the Russia-Ukraine war has also affected energy facilities. In addition, Russia's restriction on the export of refined oil products makes the global supply still full of variables. At the same time, when inventory levels are declining, countries may also take the opportunity to replenish strategic reserves when oil prices are low, providing support for prices.

In terms of operations, Lin Yingguang suggests that oil is easily affected by the policies of oil-producing countries, geopolitical conflicts, and inventory changes, with short-term volatility being intense. At this stage, it is advisable to adopt a range trading strategy and grasp the repeatedly fluctuating market. When the situation cools down, oil prices return to key supports such as the monthly or quarterly lines, or approach the levels before the conflict, it is possible to consider appropriately building positions. Once geopolitical conflicts flare up again or supply is obstructed, driving oil prices to rebound, it is possible to adjust positions accordingly.