While the overall commodities basket was essentially flat in 2013, precious metals, gold, silver, nickel and aluminium all disappointed investors. At around the $1,300 per ounce mark, it is debatable whether or not gold offers good value at present, while gold equities too have struggled.
Still, so far this year, commodities have actually performed quite well. The DJ UBS Commodity index is up around 6% year-to-date (over 12 months it is down 12%).
The weather factor
Upward pressure on prices is in part down to extreme weather conditions, says Alastair Baker, multi-asset fund manager at Schroders.
“Demand for natural gas has rocketed as it is the primary source of energy used to heat homes in the US,” he explains.
“Inventories of natural gas were drawn down to very low levels, while the volatility of natural gas prices jumped. The worst of the volatility was in late January when it became clear that the cold weather would persist for longer than expected.”
Alongside gas, agricultural prices are most likely to be impacted by further adverse weather conditions. It is clear that, as with any asset class, different component parts offer different growth prospects – some would see this as all the more reason to use ETCs rather than active funds.
“Recent negative sentiment from advisers, investors and even some fund groups has led to real opportunities to take advantage of pricing anomalies for the benefit of client portfolios,” says Lee Robertson, CEO at Investment Quorum.
Invest with glee?
He adds: “Difficulties in the sector in 2013 and the slowdown in China, while much anticipated, has been reported almost with glee of late and we think this has had a big knock-on effect on the commodity prices so it is incorrect to think there are no opportunities.”
Robertson points to the metals as a case in point: “As at the end of February there were 2.48 million ounces in global physically-backed platinum ETFS. Demand remains very strong so we continue to see this as a long-term investment.”
An alternative view comes from Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, who believes that commodities and emerging markets in tandem offer good structural entry points this year.
In particular, he picks out global energy as a long-term opportunity, in part because the firm’s recent Fund Manager Survey found investors are more bearish on energy stocks than at any time since 2002 – respondents were 2.3 standard deviations below their normal 10-year energy weighting.
He adds: “Global energy stocks are trading at 1.5X book, a 36% discount to their long-term average. And relative to other sectors global energy stocks are the most inexpensive they have been in almost 20 years.”
An in-depth breakdown into the opportunities in different commodities features in the forthcoming April edition of Portfolio Adviser, out next week.
