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Is it time to buy the worst performing market of the last four years?

Natural resources have left investors short changed since 2011, but some are saying the bottom of the market is close.

Daniel Lanyon

By Daniel Lanyon, Reporter, FE Trustnet
Wednesday January 28, 2015

A buying opportunity has opened up in the natural resources and mining sectors, according to Schroder’s Kevin Murphy, who says that certain areas of the commodities market have started to become attractive after four years of plunging share prices
   
Due to slowing growth in developing world economies such as China and the end of the often cited ‘commodity super-cycle’, natural resources portfolios have performed poorly for a number of years. 

In fact, natural resources exposure via specialist funds or individual equities such miners has been one of the worst places to invest your money over the past four years, with few investors making money, although the market has started to head up over the past few weeks.

However, whether it can continue to fall for much longer is the pertinent question for anyone looking to that rare but agreeable experience of buying at the bottom of the market.

Murphy, who is co-manager of the Schroder Recovery fund alongside Nick Kirrage, has not owned a mining stock in the past nine years he has spent co-managing the £672m fund but has just completed the acquisition of his first mining holding, although he hesitates to name which it is.

“Clearly, with the oil price halving in the past six months that has profound impacts of a variety in this [natural resources and mining] space,” Murphy says.

Oil has been one of the surprise trades over the past six months, plummeting in price despite heightened tension in some its major places of production, notably Russia and the Middle East.

However, several commentators have noted that this will likely be a boon to energy intensive miners and other non-oil commodity producers.

“In the last three weeks we have looked at every company in this space within the UK – all the large oil companies as well. The UK is blessed with lots of different oil and mining companies despite not having a proper mine in the UK,” Murphy said.

“I wouldn’t go as far to say the market has bottomed out. We don’t know and we can’t know that but you can look at valuations and what kind of profits these companies can make in a normal environment.”

“Some are more risky than others but generally the miners have better balance sheets.  After overextending spending on capex over the last 10 years, things are improving but you cannot say the same about oil companies.”

While most asset classes had a rough ride in 2011 – the year when the commodity super cycle came to an end and the European sovereign debt crisis intensified – bonds and equities have rebounded at stellar rates across most markets since while miners and natural resources in general have continued to slide south.

According to FE Analytics, while the FTSE All Share is up 35.56 per cent and iBoxx Sterling Corporate Bond All Maturities index is up 45.56 per cent over four years. By comparison the FTSE All Share Mining and FTSE All Share Natural Resources indices are down 42.97 per cent and 56.53 per cent respectively.


Performance of indices over 4yrs

  

Source: FE Analytics

Specialist mining and natural resources funds have also had a rough time only one fund in the Investment Association in positive territory over four years,  the $300m T. Rowe Price Global Natural Resources Equity fund while the likes of JPM Natural Resources is down 36.57 per cent.

Performance of funds over 2yrs


Source: FE Analytics

However, all but one of these funds is in positive territory over the past two weeks.

Performance of funds over two weeks


Source: FE Analytics


Neil Gregson, Fund Manager, JPM Natural Resources fund says the sector is “chronically under-owned and over-shorted”.

“It will only take small incremental positive surprises to move stocks off these very low levels” he added.

Another specialist, Trevor Steel, co-manager of the Baker Steel Resources Trust, formerly founder of the BlackRock Mining Team is very bullish.

Steel announced today that his closed-ended fund is raising £100m for acquisitions as he has called this the bottom of the resources market. He says that this is the right time to be investing in the sector as investors are at, or close to, the bottom of the cycle.

“Currently there is an unusual opportunity to capitalise on the greater than normal uplift in valuation associated with resource projects securing finance. Because of this, we believe the prices of mined commodities and mining companies are at, or are close to, cyclical lows,” he said.

“Add to that the fact that global urbanisation trends remain structurally supportive for commodity prices, and Chinese growth rates still imply robust global demand for commodities, now is an

John Greenwood, Invesco’s chief economist, is less sanguine expecting further sluggishness at best for investors in commodities.

“I do not expect any strong recovery of commodities in 2015.Looking forward, commodity markets are likely to stabilise over the next few months, but it is hard to envisage a strong upswing in 2015 so long as major economic areas such as the Eurozone remain weak and while inflation remains so low in so many economies.”

 
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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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