The recent news that French firm Total will be the first oil major to explore the UK for shale gas caused a debate on the rights and wrongs of fracking, but the long lead times on developing and eventually exploring this type of fuel mean it is not a short-term commodity play.
Not just energy, but the whole of the commodity sector has suffered in the past year, with both oil and gold prices struggling, in spite of the former being expected to benefit from disruptions in the Middle East. The price of Brent Crude oil slipped from its high of $119 a barrel in February 2013 to roughly $107 in January 2014 via a dip as low as $96 in April last year.
Gold has seen equal volatility in its price, seeing a high of $1,683 per ounce in February 2013 to its current level of $1,239 in mid-January 2014, but it has managed to stay above the perceived ‘bottom’ of $1,200 per ounce, at times only just, for the whole year.
Richard Dunbar, investment director at Swip, notes: “Commodities claimed the ignominious prize as the worst-performing asset class over 2013 and the outlook does not appear positive. Indeed, investors still have very little appetite for commodity assets and that is unlikely to change until global growth prospects improve substantially.
“While energy and specifically crude oil has been immune to the losses occurring in other parts of the commodity market in 2013, rising US crude oil supply, an increase in the Oranization of the Petroleum Exporting Countries’s (Opec) spare capacity and a moderation in geopolitical trouble have introduced new downside risks for energy returns,” he adds.
David Vickers, senior portfolio manager for Russell Investments’ Multi-Asset Growth Strategy, adds that he remains negative on commodities, although slightly less negative than last year.
“We are using less and less [commodities] with the exception of food which is always going to be secularly upward. It is all about supply and demand but the problem really, particularly with the metals is we had a 15-year boom in China in commodities. At times they peaked at 70 per cent of the demand for certain commodities as they went through industrialisation. But once you’ve built it [the infrastructure] that initial burst [of activity] dies down to a certain extent.
“But people have extrapolated from that, including mining companies, so I think there is a supply demand imbalance, it is starting to even out, but you always get these leads and lags.”
Peter Fitzgerald, head of multi-asset retail funds at Aviva Investors, has a negative view on commodities and does not hold them in any of the multi-asset or multi-manager portfolios.
He explains: “Recent demand for commodities has driven prices up, and this led to investment and increased supply. We believe this secular boom of rising commodity prices appears to now be reversing, as the record investment of recent years is coming online and pushing supply growth higher just as commodity demand is slowing. This dynamic, where rising commodity demand and rising prices motivate investment that leads to large supply increases just at the point when demand begins to fall, is not good for commodity investment. We also question the diversification benefits of this asset class given the increase in holdings by financial institutions.”
Mr Vickers agrees that the diversification benefits of the asset class are under question when other asset classes can provide better returns.
“Within our multi-asset funds we have a tentative position. We won’t be adding to it and because we’re adding risk in other areas we don’t need the diversification of commodities. I can’t see us adding to commodities this year. The only slight thing is that every man and their dog are negative on commodities. If everyone is that way inclined the slight contrarian voice suggests perhaps you shouldn’t be, but it is difficult to fight against your own thought process.”
While global growth seems to be continuing, albeit at a slower pace, the expected surge of developed markets over emerging markets this year could be another nail in the coffin of commodities.
Mr Dunbar concludes: “While there has been a recent pick-up in business sentiment, a backdrop of subdued global growth and slowing emerging markets economies, coupled with resurgent supply for most commodities, has painted a rather uninspiring backdrop for the asset class.
“Expectations that the US Federal Reserve will continue ‘tapering’ its asset purchases are also likely to remain a headwind. Additionally, China’s intention to accelerate the rebalancing process away from investment and export growth will keep downward pressure on many industrial commodities prices.”
Nyree Stewart is acting features editor at Investment Adviser
