According to Robin, who is a co-manager of the Threadneedle Enhanced Commodities Fund, as the macro play on commodities that was built on the inexorable growth of China has faded over the last few years, so specific market fundamentals have begun to reassert themselves.
Part of the reason for this is that, while Chinese growth has begun to slow, the prospects for Europe are beginning to improve, as is growth in the US.
“Europe is starting to show signs of healing,” he says, adding: “given the base effects evident within China, stabilising commodity demand is enough to bolster prices.”
In this scenario, Robin says, you are also seeing a drop in the correlation between the various commodities.
But, while commodities are likely to benefit from the return to growth of the developed world, especially in light of the significantly higher base from which the slowing emerging markets are working, the decreased correlation means that sum are going to perform better than others.
And, because of this, the use of specific commodities as a diversifier, is beginning to once more make sense from an investor point of view.
To this point, Threadneedle, CIO Burgess said that the group was considering moving its commodities exposure to an overweight position after a neutral holding of around 6% for the last 15 months.
According to Burgess, the diversification benefits of some of its energy-based portfolios were demonstrated recently, when the unrest within Ukraine was making headlines.
Structural shifts
Oil is one of Robin’s favoured commodities, along with lead and nickel, while he is less enamoured with gold, copper and aluminium.
Part of the reason for his favourable view of oil are the structural changes he sees within the futures market.
Commodities futures markets have been in contango (a situation where the futures price is higher than the expected spot price on delivery) for the better part of a decade, he explained.
Much of the reason for this was the decline in producer hedging at the back end of the futures curve – a decision driven by investor demand for greater exposure to the underlying spot price – and the growth in activity within the markets by investment banks.
Recent regulatory changes aimed at cleaning out the warehousing market and generally greater regulation of investment banks’ activities within commodities markets has meant that investment bank activity in the space has dwindled, while producers are being forced back into hedging by lenders that are demanding greater security before making loans.
All this means that the so-called ‘roll-return’ that has been negative for most of the last 10 years has turned positive, making it cheaper for investors to get into the market.
According to Robin, these structural changes are likely to remain in place for a long time and are one of the primary reasons that commodities are “back on the table” as an investment option.
