Specialist mining and commodity funds such as JPM Natural Resources and First State Natural Resources have had torrid few years but have rallied up to 17 per cent in the last week or so, according to FE Trustnet data.
Over the longer term anyone owning these funds, or any other commodities and mining-related securities, knows they have been a calamity for investors since the sovereign debt crisis of 2011 coincided with a bear market for stocks in this area.
According to FE Analytics, investors in the average natural resources fund have lost about 50 per cent of their cash over this four-year period with some of the sharpest falls being seen this year. This has occurred over a period that was generally supportive for UK equities.
Performance of composite portfolio since June 2011
Source: FE Analytics
The pain this year has been prompted by anxiety that slowing Chinese economic growth was going to be worse than expected. This would be mean less demand as a whole but particularly for products made by mining and other commodity stocks. A move to weaken to yuan by Chinese authorities was seen as an added woe.
Some have said this year spelled the end to the bull market for commodities that started around 2000, with the pain occurring at time when firms have overleveraged themselves by gorging on capital investment and clocking up heft debts on their balance sheets, just before the downturn began.
However, such negativity may have bred overselling if the recent performance of Glencore is anything to go by. In three weeks it has lost half its value but then subsequently made nearly all the ground back while the broader index has been flat.
Performance of stock and index since 16 September 2015
Source: FE Analytics
Nigel Bolton, head of European equities at BlackRock, says there are indications that the market has heavily overreacted.
“For European companies such as miners a weaker yuan and a slowing Chinese economy generally means lower demand for their products.”
“That said, some of our senior investors at BlackRock have been on the ground in China, speaking with policy makers, business leaders and clients; the general feeling is that there may have been something of an overreaction to the news coming out of the country”
The £381m BlackRock World Mining Investment Trust, headed up by Olivia Markham and Evy Hambro, is one of the biggest bulls on Glencore with about 5 per cent in the stock.
Hambro (pictured) has managed the portfolio since May 2009, over which time it has lost 23.30 per cent and narrowly outperformed its Euromoney Global Mining benchmark and its sector average.
Performance of trust versus index since 2009
Source: FE Analytics
Alastair McCaig, senior market analyst at IG, thinks commodity stocks may be back in fashion as rumours emerge that a Chinese stimulus package is around the corner.
“The mining industry has been battered and bruised recently, but the possibility of an easing policy from China has seen the buyers flood back in again,” he said.
“The bounce that we have seen in commodity prices over the week has continued to hold, and in the case of oil has even been added to. These more encouraging levels have seen the energy and mining-heavy FTSE show the sort of resilience required to ensure the normally investor-friendly fourth quarter of the year holds true to form.”
“The conundrum that is Glencore continues to baffle traders. Although it enjoys a market capitalisation of a major global corporation its shares are now back to last month’s placing level and are showing the sort of volatility normally associated with penny shares.”
However, he says the last few times that Chinese officials tried to inspire economic activity by declaring a stimulus package it backfired, prompting commodity-related stocks to crash rather than recover and so any move would have to be severe.
Jeremy Lawson, chief economist at Standard Life Investments, is also expecting that China could be boosted by the ruling party’s intervention in the market but expects that further pain will remain regardless.
“At the epicentre of the crisis, in China, a hard landing is not our central scenario as we expect extra fiscal stimulus, but the transition to a new growth model will remain bumpy and unfriendly for commodity producers. More deceleration in growth could lie ahead and the Chinese currency is likely to weaken moderately against the dollar,” he said.
He says the team at Standard Life is forecasting no further falls in commodity prices and stabilisation at current levels.
Mark Tinker, head of AXA Framlington Asia, advises caution and believes that while any sort of recovery to levels seen a year ago or even four years would be enormous, the risks outweigh the potential gains.
“As investors we need to think less about the ‘triple bagger’ and more about the balance of risk and return that would enable us to pick up a much ‘safer’ 25-30 per cent.”