Commodities remain extremely unpopular among investors. The latest BlackRock ETF Landscape Report showed global outflows of $32,542 from commodities ETPs for the year to date. Admittedly, much of this weakness has been from gold funds, but there was also weakness in energy-focused funds. A similar picture is seen among active funds. According to the latest European fund flows report from Morningstar, commodities focused funds dropped €1.56bn in the second quarter and have shed €1.92bn for the year to date.
For the time being, there is little sign of this changing. Perhaps the only positive sign is that selling has slowed. However, on the Rothschild theory that investors should buy when there is ‘blood on the streets’ this would appear to be the right time to reexamine commodities.
The sell-off in commodities has principally been a function of the weakness in China. Concerns over the strength of Chinese growth and poor lending practices have led investors to the conclusion that the biggest support of global commodities demand may start to falter. But Chinese economic statistics have started to improve, or at the very least, stopped getting worse. The new government has shown itself aware of the credit problems and appears to be taking measures to stem misallocation of capital.
However, it is not only the magnitude of Chinese growth that is a problem. The type of growth China is likely to experience is also going to be less-commodity dependent in future. The infrastructure-led, commodity heavy growth that has characterised Chinese growth to date is unlikely to be replicated as it strives to move to a more consumer-led, knowledge-based economic model. In this respect the commodity super-cycle is over.
The question is whether this is in the price. Certainly, commodity funds have performed horribly in many cases, suggesting that much of the bad news may already be in the prices of commodity stocks. At a time when global equity markets have generally been expanding, the BlackRock Gold & General fund sits bottom of the IMA specialist sector over one year, having dropped 2.9%. The First State Global Resources fund occupies the same slot in the global sector, having dropped 15.3% over one year.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, commented recently that, “a more gradual than expected tapering process could see the dollar weaken to the benefit of commodities and the emerging markets, areas that have suffered most from a repatriation of US capital in recent months.” In this respect, the Fed’s recent postponement of the end of quantitative easing could benefit commodities markets.
Commodities appear to remain entirely friendless. It is difficult to find an asset allocator or multi-manager willing to take a contrarian punt on the asset class, which – after all – still offers very few fundamental reasons to buy. However, for a brave investor, it has the advantages of being cheap, and a possible beneficiary of a slowdown in the rate of QE tapering. It is a long shot.