Commodities Longer Term Outlook Good, Despite Funds Falling in Value

on Jun 25, 2012

The global economic slowdown, and particularly fears over Chinese growth has had a significant impact on the commodity market, leaving investors in commodity funds struggling. One example of the damaging effects of the mini-crisis in commodities is the popular $1.7 billion J.P. Morgan Natural Resources with its investors having lost 24 percent in the last three months. And this isn’t an isolated case either, as many other similar funds are experiencing the same problems. Baring Global Resources, Thesis Australian Natural Resource, BlackRock World Resources First State Global Resources, BlackRock World Energy and Schroder Global Energy are some of the other big losers at the moment, all of them having lost at least 10 percent since January.

The crisis extends beyond production and physical commodities based exchange-traded funds (ETF) as well. Gold, silver, palladium, lead, tin, nickel and aluminium have lost more than 20 percent, oil has dropped 18 percent and natural gas has plunged by more than 60 percent.
Neil Gregson, Manager of the J.P. Morgan Natural Resources fund said that the case for investing in commodities was “very compelling”, but his words have been met with skepticism by investors. Not surprisingly so, since financial losses are typically a very strong motivator for negative attitude. Yet, there are some very reasonable points in what Gregson says.

!m[](/uploads/story/154/thumbs/pic1_inline.png)“Commodities has always been a volatile sector but there are investment opportunities for those taking the medium to long-term view. Investors should look beyond current short-term concerns, such as the European debt crisis, and focus on the medium-term outlook for investments” he said.
Gregson added that the same general direction in the sector will most probably remain over the next 10 years – there will be increases in demand, stimulated by emerging markets and there will be supply issues as well. Overall the outlook for investing in commodities is good despite the fact it will likely always display volatile short-term fluctuations, or as Mr. Gregson put it, “we believe the natural resources sector continues to offer one of the most exciting investment cases available.”

But the crisis in the Eurozone has hit every asset and sector and investors are looking for a safe harbor for their investments. However commodities shouldn’t be disregarded as an investing option, because they still offer some advantages. According to financial advisers Timothy James & Partners there are solid buying opportunities in the sector.
Industrial metals will most probably bounce back, but there will be some time before that happens. Such was the view, expressed by Willem Sels, UK head of investment strategy at HSBC Private Bank, who also added that industrial metals, like most assets, are highly dependant of the situation in the Eurozone, fears of a hard landing in China and the monetary policies of the major Western central banks.

Being one of the main indicators of China’s economic performance is one of the reasons for the industrial metals group’s recent performance, which is poorer than that of riskier assets like equities. This situation may be seen as an excellent buying opportunity by some investors, as naturally, low prices stimulate buying. However this would be a valid point only in a perfect V market, where the downward trend is followed by equally stable movement in the opposite direction. But the concerns are that the volatility of the market will put investors in a very difficult situation of constant lingering back and forth.

Neil Gregson, however, believes that ultimately strong fundamentals will prevail over short-term volatility.
“The world will always need commodities and dividends are strong and could increase,” he said.
It’s hard to argue with the statement as it’s somewhat of a universal truth. There is high demand for iron and mineral sands and with existing mining methods constraining supply, profit margins are quite high. The outlook for oil is good as well, especially with the recent discovery of new oil fields in Mozambique and Ivory Coast. TJP’s Neil Avery said that now was a good time to get exposure to oil.
Analysts agree that certain natural resource funds – such as First State Global Resources, JP Morgan Natural Resources and Investec Enhanced Natural Resources – provide good investing opportunities, despite some recent falls in value. So it seems that a longer term demise in the commodity sector isn’t going to happen for a while.


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