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Multi-Asset Supplement - March 2014Commodities could see a return to the top in 2014
On a broader view, the MSCI World Metals and Mining index also struggled woefully in 2013 with a loss of 16.41 per cent compared with the positive return of 24.32 per cent from the MSCI World index. But with the gold price refusing to stay below $1,200 an ounce, and even creeping up to a high of $1,320 on February 14 2014, could this be the start of a turnaround in the sector?
Nathan Sweeney, investment manager at Architas, says: “Amid the global emerging market equity sell-off witnessed last year, commodity indices understandably struggled. Metals and mining stocks came under particular pressure.
“However, year-to-date performance has been much more resilient and the sector has delivered a positive return while most cyclical sectors have been negative.”
Investor inflows, into passive products at least, seem to support this idea, with the results of a survey from by ETF Securities suggesting cyclical commodities such as platinum, palladium, and industrial metals remain favourites among investors in 2014.
The results – from a survey of 450 investment professionals at the ETF Securities Annual Commodity Investment conferences – show nearly 20 per cent of respondents ranked commodities as one of their top-three picks, with platinum the favourite for 31 per cent, followed by copper and silver.
According to ETF Securities platinum and silver exchange-traded products (ETPs) received the largest inflows in 2013 with $1.3bn and $841m respectively as investors shifted towards commodities more positively correlated with the global industrial cycle.
Nicholas Brooks, head of research and investment strategy at ETF Securities, explains: “Most investors we surveyed indicated they are positive on the outlook for global growth in 2014, with the US leading the way. This likely explains their general bullishness towards broad commodities after three years of underperformance, with platinum and copper top picks.”
Investor sentiment and rising prices are a start, but Mr Sweeney also highlights that the commodities sector is “at the cheapest it has been on a relative cyclically adjusted p/e basis for 35 years”.
He notes this is partly based on the expectation that company earnings will continue to deteriorate on weak emerging market growth and years of excessive cap-ex during the resources boom, but adds that “increasing institutional fund flows suggest that the attractive valuations are drawing more investors to the sector”.
A further potential catalyst to the sector, particularly mining, is the number of recent management changes at some of the largest mining companies with both Rio Tinto and BHP Billiton appointing new chief executives in 2013.
Mr Sweeney explains: “As a result of shareholder frustration with poor capital returns, many of the large mining companies have seen management changes and new commitments to reduce capital spending. The reductions should improve earnings and the prospect of dividend growth, drawing investors back into the sector.”
However, the manager warns that it is not all plain sailing for commodities in 2014. “The Chinese government’s recent statement that it would like to move away from infrastructure to consumption highlights a potential obstacle for construction commodities in particular,” says Mr Sweeney.
