Last year witnessed the MSCI World Energy index nosedive 18 per cent. But since the start of 2016 to June 10, the measure has jumped by 16 per cent, according to data from FE Analytics.
Of course, all eyes have been on the oil price, which after crashing below $28 a barrel earlier this year topped the $50 mark in late May.
But gold too, bolstered by its safe-haven status, has enjoyed a strong year-to-date run with the price of bullion up 21 per cent.
Some funds have delivered strong returns in 2016 in the wake of the rebound, with Schroder ISF Global Energy ahead by 31 per cent while Smith & Williamson’s Global Gold & Resources portfolio has rocketed by 91 per cent.
Geoff Blanning, head of commodities at Schroders, believes the market has come to a “turning point”. He says: “At least a dozen commodities have gained more than 10 per cent this year and a number have gained more than 30 per cent; clearly, the bear market is over.”
Mr Blanning highlighted a number of supporting factors at play, namely the threat of inflation, as well as a change in supply patterns. He says: “With prices down 70-80 per cent in many commodities, production is no longer growing.”
In addition, he points to the weakening US dollar, which commodities are typically priced in, and India’s rising demand for resources. Looking at the dollar versus currencies from the UK, India, Japan, Switzerland, Australia, Canada and the eurozone, it only made gains on the UK and India.
“India’s demand for crude oil, for instance, is currently growing at a much faster rate than that of China, which is making a big difference to oil market dynamics. Indian demand for a whole range of commodities – including palm oil, sugar, rubber and natural gas – is rising fast,” adds Mr Blanning.
However, Julian Chillingworth, chief investment officer at Rathbones, is less upbeat. “We have not been hugely optimistic about oil and base metals over recent years and have positioned ourselves as such,” he says.
He notes the recent upswing in the oil price has been partly driven by supply disruption, including wildfires in Canada, as well as unrest in Nigeria.
Mr Chillingworth argues that, ultimately, demand is the primary issue and notes the impact of China’s easing hunger for commodities.
He says: “Energy and commodities will be buoyed by global growth and, oil in particular, by supply disruption.”
Sentiment across pockets of the adviser community has been warming up towards the asset class, too.
Whitechurch Securities managing director Gavin Haynes believes the “uniform pressure of recent years has started to dissipate”.
But, rather than investing in commodity or energy-specific vehicles, Mr Haynes is gaining access to the energy and commodity sector by investing in funds that have exposure to the sector, such as Invesco Perpetual European Equity Income and JOHCM UK Dynamic funds.
“We are looking at fund managers who are taking a more contrarian approach where they feel commodity equities look extremely oversold,” he says.
Chelsea Financial Services has taken a more direct route, having recently added the Guinness Global Energy fund to its model portfolios. In January, the group upped its exposure to gold, partly via the BlackRock Gold & General fund.
Managing director Darius McDermott says: “The easy money has perhaps been made on gold, however there is still a decent discount between gold equities and the price of bullion. The oil supply/demand dynamic seems to have altered from last year. Energy equities have lagged the oil price but we believe they will follow.”
The moves could be warranted, according to JPMorgan Asset Management global markets strategist Alex Dryden. He, like Mr Blanning, believes commodity markets are showing signs “of approaching a bottom”.
But he notes there has already been a significant rise, pointing out that at the end of 2015, the average price earnings ratio of the MSCI World Energy subset was 18, but by June 9 it had almost doubled to 30. Importantly, he explains, underlying earnings have been fairly static.
“The bear market could be over but only for some commodities,” he says.
“While oil and gold have had a good year so far in 2016, for industrial metals, the fundamentals are very different. Slowing Chinese growth is part of the problem but so is its government’s subsidising of the steel industry.”
As such, Mr Dryden cautions investors should not view commodities “as one homogenous block” and that further volatility in the space “is guaranteed”.
