Can commodities sustain their rally?

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Multi-Asset Investing - June 2016

Meanwhile the natural resources sector overall “has staged something of a revival” according to James Sutton, client portfolio manager of the JPM Natural Resources fund. As to whether the rally has legs, he points to the cyclicality of the sector, which stems from the typical expansions and contractions in the global economy, which is compounded by extreme investment cycles that push commodities from undersupply to oversupply and back again. “It is these investment cycles, rather than fluctuations in demand that have a greater impact on commodity market fundamentals.”

But is there a place for the asset class in a multi-asset portfolio?

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Kevin O’Nolan, portfolio manager at Fidelity Solutions, says multi-asset investors can benefit from an allocation to commodities.

“Commodities can provide inflation protection and diversify your sources of return within a portfolio. The oil supply/demand balance has been improving and this is boosting the wider complex.”

Mr Coombs agrees commodities can have a place in a portfolio, with agriculture and industrial metals also potentially good inflation hedges. But he points out: “You have to be very careful because of the future curves in these areas. That is why I approach commodities with extreme caution. Overall, we think global growth will be relatively subdued and below trend so it’s not a great backdrop for commodities. We don’t see it being particularly inflationary or deflationary, so there is no real compelling reason for me to consider using commodities at the moment.”

Nyree Stewart is features editor at Investment Adviser