Investec Enhanced Natural Resources managers George Cheveley and Bradley George have been increasing their net market exposure to commodities as they see positive macro signs for equities in gold, iron ore and the energy majors over the next few months.
Cheveley told Citywire Global that he expected an upturn in meaningful Chinese growth in the first two quarters of next year, which would benefit iron ore companies in particular, and said the large diversified miners such as core holdings BHP and Rio Tinto would also be able to surprise the market with better than expected cost savings.
'We expect to see Chinese growth reaccelerate. We expect to see many commodity prices holding or going higher and see many companies particularly in basic and bulk materials cutting costs. BHP and Rio should be able to do that, and also a number of junior mining companies.'
Adding to Gazprom and BG Group
After a difficult 12 months for the fund and commodities in general amid fears of a China-led growth slowdown, Cheveley told Citywire that many investors were now under exposed to the sector and he expects interest in commodities to increase once again in 2013.
By the end of November, Cheveley said net market exposure to commodities had risen to around 70% of the £200 million portfolio, from 65% at the end of October and 45% at the start of 2012.
Around half of the exposure is to the energy sector, with positions in US oil services groups such as Baker Hughes, Weatherford and Precision Drilling added, while over the past month, exposure to Russian state giant Gazprom and UK-listed BG Group has also been increased.
The pair expect a seasonal rise in the price of energy in the Northern Hemisphere and a wave of corporate activity among the major energy companies as they look to maintain their growth targets, but they also believe there has been a shift away from what has been mainly a US - focused energy market.
Cheveley told Citywire Global: 'We have added some Gazprom and BG after its fall from grace as we anticipate some tightness in the European market as Japan has been buying up much of the Liquid Natural Gas Supply. These companies are best placed to take advantage of any spikes in supply as both are global players, and gas as a theme has now moved towards a more global focus.'
The fund's gold position has been maintained at around 10%, with 7.5% in gold equities and a further 2.5% in ETFS Physical Gold.
Gold story reasonably supported
The managers have been avoiding the largest gold companies as they continue to see short term weakness, but still expect the gold spot price to be above $1800 at the end of next year.
'We still think the gold story is reasonably well supported by central bank buying, negative real yields and investors seeking diversification, but ultimately our gold exposure is a hedge for if the US fiscal cliff or European situation turns out worse than expected.'
The advent of ETFs has made owning physical gold far easier and has also acted as a drag on listed gold equities over the last two or three years because many gold firms pursued volume rather than margin growth.
Cheveley thinks many of the larger gold companies have been using decent levels of cash flow to invest in further volume growth rather than improving profitability but now believes capital discipline is improving again.
Elsewhere in precious metals, the fund continues to prefer holding physical palladium and platinum (around 6% of the portfolio) ETCs as the managers believe holding direct equities in the sector is still too much of a risk after the well documented industrial unrest and production issues in South Africa this year.
'The strikes have calmed down but we still see problems with companies cutting capacity and over optimistic production forecasts. We expect Anglo Platinum to cut capacity and see structural problems with Lonmin so prefer to hold the physical commodity. Lonmin is still geared for a rally but it has pretty negative cashflow. It has averted its short term issues but if production doesn’t improve it could be in serious trouble again in a year's time.
Since the fund launched on 30 May 2008 to the end of November, the fund has returned 8.4% compared to the HSBC Global Mining return of -14.2% and the Average Manager - Alt Ucits universe return of 15%.