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Is the bear market in commodities over?

JPM’s Neil Gregson says that improving macroeconomic conditions and the completion of cost-cutting operations by the major miners should help the sector to continue its recovery.

Alex Paget

By Alex Paget, Reporter, FE Trustnet
Wednesday April 16, 2014

Commodity-related equities have now troughed, according to JPM’s Neil Gregson (pictured), who says that the market has moved past the point of maximum pessimism.

ALT_TAG Having significantly underperformed and hit investors with huge capital losses over recent years, commodity and basic material stocks have bounced back and performed well relative to the wider global equity market so far in 2014.

Gregson, manager of the £1bn JPM Natural Resources fund, says this recovery in prices demonstrates that the market has now bottomed and that investors can expect a period of decent performance from the sector.

“Commodity related equities outperformed global equities in the first quarter, an impressively robust performance given the negative emerging markets news flow,” Gregson said.

“This confirms our view that we have moved beyond the point of maximum pessimism for investor sentiment regarding the resources sector.”

According to FE Analytics, the MSCI World Metals and Mining index has delivered a return of 1.07 per cent over the last three months while the wider MSCI AC World index has lost 2.20 per cent over that time.

Performance of indices over 3 months

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Source: FE Analytics

Gregson attributes that pick up in the sector to an increase in M&A activity, which is in turn due to improved confidence from management teams and investors.

He says that mining companies have learnt from past mistakes and have become more disciplined in terms of their capital allocation. Gregson says that the likes of BHP Billiton, Rio Tinto and Glencore Xstrata have all cut costs effectively and are returning more to share-holders via dividends.

The manager says that all these factors, along with certain macroeconomic dynamics, should help the commodity sector to continue to perform well.

“It is this positive bottom-up momentum in the sector which has led to mining stocks registering positive performance year to date despite emerging market headwinds,” Gregson said.

“We expect more benign macroeconomic conditions during the rest of this year to positively affect commodity prices, which remain close to the marginal cost of production in many instances.”

“At the same time, we believe consensus expectations on the level of supply likely to hit the market this year are too high, particularly in copper and iron ore. As such we anticipate commodity prices surprising to the upside.”


However, the recent pick up commodity equities comes after a period of sustained poor performance. For instance, the MSCI World Metals and Mining index has lost a hefty 40.96 per cent over three years while global equities have made more than 20 per cent. This has hurt Gregson’s fund’s returns.

Performance of indices over 3yrs

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Source: FE Analytics

Our data shows that JPM Natural Resources has lost more than 45 per cent over three years and has lost a further 5.41 per cent over the last 12 months.

FE Trustnet has highlighted that a number of fund managers have been increasing their exposure to the bombed out sector recently.

M&G’s Randeep Somel has been increasing his weighting to the miners due to ultra-low valuations and a wholesale change in management across the industry. Somel says that, as a result, a 2008-style buying opportunity has opened up in the sector.

A number of leading experts says that investors shouldn’t get carried away with recent surge commodities, however, as emerging markets – which have typically been the major drivers of natural resources – are going through a period of structural change.

Allan Conway, head of global emerging market equities at Schroders, told FE Trustnet yesterday that he thinks the recent recovery in his asset class should be seen as a “trading rally” and not the start of a prolonged bull-run.

The major reason for that, Conway says, is because it has been the resource-orientated economies such as Brazil and South Africa that have driven the spike in performance, which are still very troubled areas of the market.

He warns investors that the next stage of the emerging market bull-market will not be driven by commodities like in the in the early parts of the 2000s and is instead focusing on exporters and technology companies.

“The one thing I am not convinced about is a significant rally in commodity prices,” Conway said.

“The likes of Brazil and Chile have performed well and while there are signs of a global economic recovery, it isn’t that strong. There is a huge amount of supply coming to the market when demand is still relatively weak.”

“We are focusing on manufactured goods instead of the raw materials you pull out of the ground.”

FE Alpha Manager David Coombs is also very sceptical of the recent rally in basic materials stocks as he says that the drivers for emerging markets are now going to be a lot different than they have been in the past.


Performance of indices over 10yrs

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Source: FE Analytics

“I do think it has changed,” Coombs (pictured) said. “There is going to be a lot of volatility, which may seem obvious, but let me explain.”

ALT_TAG “The Chinese authorities have clearly stated want to move their economy from an investment-led to a consumer driven one.”

“The risk is that they panic as GDP falls and they start building roads to nowhere and that would push commodity prices up again.”

“However, one can’t foresee that happening. If you look at the trend, you would feel that there is a headwind facing commodity prices given that you would expect demand from China to slowly fall over the next five to 10 years.”

The price of iron ore, for example, fell to an 18 month low-last week due to fresh concerns about weakening Chinese demand.

Coombs says that commodity bulls would argue that developed economies such as the US and UK, which have massively underinvested over the last few decades, could pick up China’s slack. However, he warns anyone against using it as a base case scenario.

Coombs added: “If you look from a common sense point of view, I think commodities are in a headwind, not a tailwind.”

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