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Commodities - November 2013



    Energy as a whole has become a hot topic, particularly in the UK amid plans for the first nuclear power plant for 20 years to be built in Somerset. In addition Ed Miliband, the leader of the Labour Party, has pledged to freeze energy prices if he comes to power just as four of the big six energy companies (at the time of writing) have upped their prices for consumers at a time when the underlying commodity is below its peak.

    Frances Hudson, investment director and global thematic strategist for the multi-asset investment team at Standard Life Investments, notes that commodities have not really performed, even in the uncertainty surrounding the US shutdown and budget negotiations.

    She explains: “In spite of all the wrangling over the fiscal situation in the US, the so-called safe havens of gold and commodities didn’t perform. The spot price of gold had fallen $50 between October 1 and October 16 when a deal was announced. It is also down 22 per cent year to date.

    “But that is not actually untypical. We think of gold as a safe haven but there are types of crises that it is more suited to and that would include things in the Middle East. But the judgement on the Middle East and Syria is that it’s not a huge threat to regional stability or to the shipments of oil, and that would then feed through to both the oil price and the gold price.”

    Abbas Owainati, economist for the multi-asset team at Old Mutual Global Investors, points out: “Oil is pretty much a function of the demand and supply and so far 2013 has been more of a supply-shock event year, especially focusing on the Middle East, where tension has seen oil prices peak in August to as much as $117 a barrel.”

    Other supply constraints include disruptions in Libya, in Egypt and in Iraq, combined with the sanctions imposed on Iran.

    Tom Nelson, portfolio manager on the Investec Global Energy fund, notes: “At a physical supply level we’ve seen considerable outages. All of this has served to remind the market that there should be - and historically always has been - some geopolitical risk premium in the oil price because of the inherent uncertainty and unreliability of supply from some of the major producing regions.”

    He adds that statistical modelling on the supply-demand balance in the future would suggest the oil market will get tighter as production declines.

    Mr Nelson explains: “When the market is incrementally tightening the sensitivity to the supply shocks and supply disappointments such as we’ve seen this year, becomes even greater. As spare capacity reduces the geopolitical risks increases and that why we expect the oil price to move higher through this decade, we expect it to average $115 next year.”

    Meanwhile, gold has had an equally volatile year so far with the price falling from its peak of $1,693.75 per ounce in January to roughly $1,333 per ounce in mid-October. One explanation is that in an environment of benign inflation, macro stability and upbeat risk assessment investors are rotating out of the sector and therefore potentially putting downward pressure on the gold price.

    Scott Winship, portfolio manager on the Investec Gold fund, adds the gold price has also been volatile as the market tries to second guess the likely timeline for the start of US tapering of quantitative easing.

    He adds: “What we’ve seen is that since global gold ETFs peaked in December 2012, we’ve seen roughly a 30 per cent net outflow from those global gold ETFs.

    “Those outflows need to find a place in the market and unfortunately the size of the buyer hasn’t been enough to mop up that supply, so we’ve really had a case in the last 10 months or so of excess supply. We’ve seen most of Asia increase their demand rates significantly, particularly India where we’ve seen record imports.”

    However, as India struggles to balance its economy the government has raised the import tax on physical gold four times in 2013, to reach the current rate of 15 per cent.

    But with jewellery pipelines already stocked ahead of the wedding season this might not have a material impact on the gold price until next year, if the imports start to decline.

    While there is still some value to be found in certain areas of commodities it is clear the sector is feeling the effect of investor rotation and the question is whether this will get better or worse once the Fed tapering starts in earnest.

    Nyree Stewart is deputy features editor at Investment Adviser


    Aj Somal, chartered financial planner at Aurora Financial Planning:

    “l am not looking to increase the commodity exposure for my clients, as the risk profiles of the majority of my clients limits their exposure to this area of investment, it still represents a small segment of client portfolios (around 2-3 per cent), but there are no plans to increase this.”

    Amanda Davidson, director at Baigrie Davies:

    “Our philosophy is not to go for sector bets but to put together asset allocations that are durable for the long term. We’re not making any changes at the moment.”

    Joss Harwood, director at Eldon Financial Planning:

    “We don’t take tactical decisions with regard to choosing sectors for our clients as we don’t believe that anyone can regularly correctly predict the way that markets will go. Indeed, our research points to the opposite (as in, forecasters get it wrong more often than right). We prefer to use very well diversified low-cost portfolios that can be accurately benchmarked against accepted global indices. Our clients’ individual life planning needs drives the underlying asset allocation and an appropriate level of cash is held in addition.”

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