Are commodities falling out of favour with investors?

This article is part of
Multi-Asset Investing - October 2013

Commodities have been falling out of favour with gold seeing a particular decline in popularity as the price slipped from its 2012 highs, however current macroeconomic conditions may be the trigger to highlight opportunities in the sector.

The situation in Syria has caused a two-fold effect within equities with the oil price spiking higher to roughly $108 (£68) a barrel for WTI Crude oil compared with approximately $90 a barrel at the start of 2013.

But Neil Birrell, manager of the Premier Diversified fund, notes: “If you look back historically at the oil prices, it has been at or near $106 a few other times so it is not an unusual level for it to get to. The peak was in 2008 when it got up to $140 so it is not a massively high figure but it has had a bit of a spike recently for obvious reasons.”

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That said, he highlights that Syria itself doesn’t have a huge effect on the oil price, as before the civil war in the country, it only produced somewhere in the region of 375,000 barrels of oil a day, which has fallen to roughly 70,000.

“The key issue for the world in terms of the oil price is the impact that will have potentially on economic growth. A higher oil price has a negative impact on economic growth in that the costs of manufacturing and producing become significantly higher, and in particular, that probably has a bigger issue for the emerging markets if the price goes up and stays up. So the length of time the oil price stays high for is, I think, almost as important as the level it gets to.”

Meanwhile, Angelos Damaskos, chief executive of Sector Investment Managers and fund adviser to the Junior Gold fund, suggests the main drivers of the gold price in recent months has been a rise in demand for physical bullion from Asian investors and a reversal of sentiment among holders of ETFs and other financial instruments.

But he adds: ““UN intervention in Syria could cause greater instability in the region, especially as Iran is its key ally. Rising risks in the world’s most prolific oil-producing region could cause investment flight to safe heavens, principally gold. The next phase of gold’s rebound would be hitting $1,500/oz. At this level, investor confidence should increase significantly as this is believed to be the average replacement cost of new production.”

Elsewhere within the wider commodities sector Richard Davis, co-manager of the BlackRockWorld Resources Income fund, points out there are plenty of interesting opportunities, but the key is to be selective.

In addition, he highlights the dividends being offered by a number of energy companies that are also trading on attractive valuation multiples.

“I think dividends are quite interesting because the yields you can get now are really quite attractive. I think that might lure some generalist investors back into the commodity space because yields are really quite competitive and income generally is an important theme.”