Investors should be prepared to see a huge long-term uplift from commodities and emerging market equities following their recent falls but to also expect further weakness in the short term, according to NN Investment Partners head of multi-asset Valentijn van Nieuwenhuijzen.
Emerging markets and commodities have been a catastrophe for investors this year, following several years of weakness and underperformance.
According to FE Analytics, investors in the average IA Global Emerging Markets fund and a typical natural resources fund have lost about 20 and 25 per cent, respectively, of their stake in just six months.
The pain has been linked. A slowing Chinese economy means less demand for the products made by mining and other commodity stocks as well as worsening sentiment towards emerging markets as a whole.
More broadly, an end to the bull market for commodities – the so-called ‘super cycle’ that started at the turn of the millennium – is also said to be occurring with many firms suffering after overleveraging to meet high capex expenditure in the few years before the downturn began.
Performance of sector and portfolio since April 2015
Source: FE Analytics
The likes of JPM Natural Resources, Investec Global Natural Resources and Blackrock World Mining have had an ever more torrid time over the longer term and are now sitting on losses close to 70 per cent since March 2012 when the market peaked, way behind the broader equity market.
Performance of funds and index since March 2012
Source: FE Analytics
Not one member of the IA Global Emerging Markets sector is in positive territory over the past year and only 11 per cent have made a return in three years.
However, rapid falls in markets rarely last forever and Van Nieuwenhuijzen says at some point both trades will offer substantial upside compared to any other asset class at the moment.
“We have had a cautious view on emerging markets for two years and we are having ongoing debates about whether we have seen the bottom, but at some point in time it is going to be the trade of the year to state buying commodities and emerging markets but we are not quite there yet,” he said.
Austin Forey, manager of the JPM Emerging Markets trust, says sentiment to the broader emerging market asset class and the funds that invests in it will depend on what happens in China.
“The authorities are probably fighting a secular transition to lower economic growth as if it were a cyclical slowdown. Real, far-reaching reforms will have to involve a redrawing of the state’s role in the commercial sector and an acceptance of the primacy of market forces in determining outcomes, rather than government policy,” the manager said.
“History teaches us that when pessimism abounds and valuations have fallen, one should in fact become more positive rather than the reverse.”
Marcus Brookes (pictured), who heads up Schroders multi-manager range, has started to buy into emerging market funds and commodities funds recently, believing they will offer greater upside eventually than the developed equity markets do at present.
“We recently took a small step into emerging markets for the first time in a long while, though that is not to say we are becoming bullish on the area yet. Similarly, we added a little to commodities recently, but only because we had been so underweight and there is potential for further weakness to come,” he said.
“Our favoured equity markets are still Japan and Europe, but market moves are opening up other potential pockets of value. Emerging markets is one such pocket and late in August we dipped our toe into the region for the first time in a long while, making small purchases of Artemis Global Emerging Markets and Artemis Emerging Markets in one of our portfolios.”
“This is just a baby-step for now and more a statement of intent than an attempt to call the bottom of the market, but it reflects our willingness to change the flavour of our equity exposure when the time is right.”
However, some such as John Redwood, investment chairman at Charles Stanley Pan Asset, say the outlook is still very negative for commodities with more pain to come and by extension the emerging markets that are heavily geared to the price of commodities.
“We have been very negative about commodities and remain so. Commodity prices have stayed low … pointing out the excess supply in several leading markets,” he said.
“There need to be more cancellations of investment before the excess supply is squeezed out. Gradually supply and demand will come into better balance, but it is taking time.”
“Slower growth in manufacturing adds to the strains on commodity prices. The same logic keeps us pessimistic about commodity producing countries, and especially about Latin America. Brazil, the largest LatAm economy, remains mired in difficulty, fighting both inflation and recession.”
Indeed, the performance of the world’s largest mining company Glencore in one day’s trading on Monday when it lost a whopping 30 per cent illustrates just how bearish the market has become. But also how unsure this sentiment is as the price has rocketed back up.
Performance of stock and index over 1 week
Source: FE Analytics