Grantham caused a stir last month when he suggested that structural changes within commodities markets had resulted in a permanent shift in pricing fundamentals. “The world is using up its natural resources at an alarming rate”, he stated.
“The world isn’t running out of resources just yet”, counters Warner, manager of the £1bn First State Global Resources Fund. She also suggests the response to such trends is already underway.
“We think that behaviours are already changing in response to this higher price environment. Companies are investing heavily now to meet demand.
“Humans have shown themselves to be very inventive and adaptable. Substitution and technological changes will also take place. We’ll also see thrifting – using less platinum in water catalysts, using less nickel in stainless steel, substitution of plastic pipes for copper pipes, aluminium instead of copper in power lines.”
While Warner also notes that China’s current level of GDP growth “won’t last forever”, she maintains that the economic health of emerging markets is “the best leading indicator we have in terms of the sustainability of the high prices companies are enjoying today”.
Value?
The market is still not necessarily pricing this in, however: Warner believes companies such as Rio Tinto and Xstrata are trading on relatively undemanding multiples for large diversified companies, even before adjusting for cashflow.
“The market is clearly not paying for the commodity prices we’re seeing today. It is saying it believes commodity prices will fall substantially from here for the next few years.
“What we’ve seen over the past few years is that analysts have been upgrading over time – with the exception of the midst of the financial crisis, every year for the past decade analysts have believed that year would be the peak for commodity prices”.
Nonetheless, she acknowledges that the market is nervous and “looking for direction”, suggesting that a lot of activity remains reactive rather than borne out of a belief in the strength of investment markets.
The Global Resources Fund’s largest positions remain in “high quality” companies such as BHP Billiton, Rio Tinto and Xstrata. Warner also cites the likes of Concho Resources as a key overweight, noting that the fact that all its assets are in West Texas means it provides “good exposure to oil production without taking on too much exposure to political risk, nor geological risk”.
“It is the tail of the portfolio where we put the alpha,” she says. “We are really going for the high impact exploration and development companies”.
