The upshot: despite continuing uncertainty in financial markets, commodities are well placed to overcome most obstacles. Partly because the companies which are performing strongly in the sector are still very attractively priced and also because the demands from emerging markets and supply shortages are still such key factors for the medium term.
A fresh impetus since the new year Natural resources market has received a fresh injection of attention this year with an extra US$70bn ploughed in, raising the sector’s value to around US$400bn. However, in global terms this is not such a huge amount considering the amount of activity in this arena. While volatility has increased due to speculation and money market tightening there are still many longer-term opportunities due to persistent extraordinary growth stories and energy requirements.
Specifics – what to watch out for Gold and platinum are obviously very topical after recently hitting all time highs – then suffering a sharp correction which we believes was to be expected. But the immediate rationale for remaining positive on gold is justified: with inflation threatening and dollar uncertainty set to continue. Likewise, there is a bullish stance on platinum, especially with extreme energy shortages in South Africa (the largest producer) meaning it cannot even be extracted from the ground.
Coal and iron ore are intertwined as both are involved in the production of steel and both are experiencing extraordinary high demand – again, due to China’s massive infrastructure programme. While supplies of coal in the ground may be plentiful, getting it to the market has become tortuous – with floods hampering progress in Australia and Indonesia and problems at ports only accentuating the turmoil. The iron ore price also benefits from complete transparency as the rate is negotiated and so is not hindered by the quirks of speculation. Uranium meanwhile, is down 65% to date this year, but remains fundamentally very sound in the medium term as the logic of more nuclear power stations is inescapable.
China – still putting on a good show, despite a few wobbles. While base metal inventories have risen moderately and the pace of growth slowed, the Chinese economy remains remarkably strong. Retail spending has surged ahead 20% year on year and while there may be some warning signs – such as elevated food costs – the economy is pretty much unaffected by what’s going on in the rest of the world. And this has a huge impact on natural resources of all flavors.
Big oil – but not big returns. While the oil price has continued to trickle upwards, energy shares are not reciprocating this sentiment. Some of this is because many of the major oil producing nations are not being overly friendly towards large western oil corporations – with even appropriation of assets occurring. This coupled with scarcity of new sources of revenue has impacted on the underlying price of these companies. However, this has been overdone and there are many firms poised to profit from oil prices creeping ever further north.
Soft commodities – not a hard decision. The reasons are plentiful and supported by sound fundamentals: some wheat harvests are down 40% with Australia and the Ukraine particularly hard hit due to adverse weather. Stocks of grain in US warehouses are as low as they have been since the 1970s and the trend of adapting farmland to produce bio-fuels further constricts the supply dynamics.
With global warming – man-made or otherwise – now having a profound impact on harvests worldwide it appears to make perfect sense to have a reasonable exposure to soft commodities to catch further upswings in prices driven by future tightening.
The outlook – still positive, still many reasons why. It’s no surprise growth remains positive about the sector, and the affirmative stand is backed by definite and quantifiable indicators. Many companies in the sector are undervalued although they are making handsome profits.
And overall stock levels for many resources balance on a precipice. Of course, when you also take into consideration the drift towards new money creation and further inflation, having exposure to solid assets with a sustainable demand stream makes unassailable sense for any modern portfolio,