Asset class declines on Chinese economic slowdown

This article is part of
Multi-Asset - November 2014

Commodity prices have been falling predominantly on the back of slowing Chinese growth, as well as other macro factors.

Nevertheless, this asset class is a common feature of multi-asset investment strategies, with managers gaining exposure to commodities either directly or indirectly.

Rasmus Soegaard, portfolio manager, alternatives, at Old Mutual Global Investors, backs the asset class. He says: “In terms of commodities as an opportunity set, we see plenty of opportunities across the spectrum and we believe the multi-asset approach is a good way of getting exposure to commodities.

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“We use commodities extensively across our multi-asset portfolios and view them as a real return asset class. We generally believe it’s a decent hedge for unexpected inflation as an asset class.”

But Scott Spencer, investment manager in F&C Investments’ multi-manager team, voices his concerns about the story in China, where slowing growth has come to define the country’s economy.

He explains: “This whole move from investment-driven demand to a more consumer-driven demand, we think has just started to have an impact on commodity prices. You’ve seen it with oil and copper and some of the soft commodities.”

Mr Spencer acknowledges that a Chinese slowdown and the reforms introduced by the government in December last year will help the economy in the longer term. He adds: “I think longer term you will get more sustainable growth out of China, but it’s probably going to be slower growth and that is definitely having an impact on commodity prices.”

Erik Knutzen, chief investment officer, multi-asset class, at Neuberger Berman, notes: “In China, investors are assessing lower expectations for growth in the midst of a property market correction and concerns about a credit bubble.

“And the rising dollar and reduced global growth outlook are sending commodity prices lower, raising concerns around commodity-exporting emerging markets.”

In spite of current negative sentiment around the price of commodities on the back of a rising US dollar and weak Chinese growth, Mr Soegaard sees investors becoming increasingly interested in the asset class.

He points out: “It’s no longer necessarily a space for purists or specialists, the markets have opened up in terms of the way you can access commodities. You can access them through diversified indices, you can access them through more mainstream funds.

“The market, as far as I’m concerned, is opening up, which has also led to ebbs and flows in terms of retail investors.”

Mr Soegaard explains that commodities have a role to play in an inflationary environment. “I think investors have certainly woken up to the fact that commodities can be a good hedge for unexpected inflation – that’s what we’re thinking. So it’s no surprise to see more interest in the asset class.”

Ellie Duncan is deputy features editor at Investment Adviser

Reforms in China