Emerging MarketsMay 23 2017

Greenberg: no new commodity rally

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Greenberg: no new commodity rally
Emerging market versus commodity indices

Hermes emerging markets specialist Gary Greenberg has said the commodity price rebound is unlikely to resume, but predicts prices have already risen enough to aid some developing economies.

In dollar terms, the Bloomberg Commodity index fell 42 per cent between April 2013 and the beginning of 2016, but bounced back in the subsequent 12 months with a 12 per cent rise.

However, the boost – which was helped by Donald Trump’s US election victory – has stuttered of late, with the index falling 5 per cent in the year to date.

Hermes’ head of emerging markets, and manager of its $1.6bn (£1.2bn) Global Emerging Markets fund, said a dip in prices this year was not an abnormality, adding that demand for commodities was simply weaker than earlier in the decade.

Mr Greenberg said the factors that led to the initial 2013 slump – sluggish economic growth and a cutback from Chinese infrastructure spending – had not gone away. 

He added that the boost to prices from November’s US election result looked slightly misguided. “The policy outlook for the US and China, despite the hype, is unlikely to tilt towards dramatic acceleration of infrastructure spending,” he said.

“One doesn’t hear anything at all about Mr Trump’s great infrastructure plans, and China has a choice of heading towards 400 per cent debt to GDP or an economic slowdown. I don’t see a third option.”

Mr Greenberg said he expected China to drift towards a slowdown – an economic event already appearing to take shape, with the country expected to grow 6.5 per cent this year versus 6.7 per cent in 2016.

He suggested this ruled out a return to the pre-2013 commodity price surge that was fuelled by China’s growing demand for materials. The US was also unlikely to break budget controls to boost spending, he added.

“It’s possible people will go crazy in China and build new cities with nobody in them, and that the US takes a budget deficit of 6 per cent to get things going, but I don’t think it’s likely in the next couple of years,” he said.

However, the manager noted the 2016 rise in commodity prices had done enough to indirectly boost ailing economies of Latin America, such as Chile, Peru and to some extent Brazil. The region currently makes up around 13 per cent of the manager’s fund.

“Now [commodity prices] have recovered, even though they’re not going anywhere, the economies of Peru, Chile and Brazil are stronger,” he said.

“We should see higher visibility of moderate economic growth. Latin America is interesting and attractive.”

Mr Greenberg was quick to dismiss any concern that the 2017 slump in prices would otherwise fundamentally affect his chosen region.

A previous slump in 2013 coincided with a torrid time for emerging market stocks. But although the return to form for the asset class began at the same time as the 2016 commodity run, performance this year has diverged, with the MSCI benchmark up 12 per cent year to date.

The manager said commodity firms only made up 18 per cent of the MSCI index, and 42 per cent of commodity-exporting countries’ universe, but the impact on sentiment was much higher.

“In order of impact you have sentiment, country effect and sector effect. The commodity prices won’t be a tailwind anymore; nevertheless, emerging markets are a whole lot more,” he added.

The Hermes Global Emerging Markets fund has returned 66 per cent over three years versus the IA Global Emerging Markets sector average of 38 per cent, data from FE Analytics shows.