In July I wrote about the commodities comeback. Now, at the end of 2016, I wanted to review the same sector, instead focusing on the impact of Donald Trump’s November US presidential election victory.
After hitting a 14-year low in January, the rest of 2016 has been good for the commodities sectors. With the exception of corn, wheat and platinum, all the main components in the energy, metals and agriculture sectors are up double digits.
Commodities rallied around 5% on Trump’s win as investors anticipated a $1 trillion (£790 billion) spend on infrastructure projects and higher growth in general. That, at least, is the popular theory.
Will McIntosh-Whyte, assistant fund manager for Rathbones’ Multi-Asset Portfolio funds, is not convinced by it. ‘Copper, iron ore and coking coal prices have been rising rapidly since late October or before, a time when a Trump presidency was pie-in-the-sky,’ he said. ‘All of them dipped immediately after Trump’s win, before heading higher.’
He attributes the recent strength in industrial commodities to improving global Purchasing Managers’ indices. Chinese economic data is particularly significant here.
Nick Peters, multi-asset manager at Fidelity International, agreed. ‘Trump hasn’t even taken office yet and won’t necessarily have an easy ride from Congress over increasing infrastructure spending. The outlook for Chinese commodity demand will remain more important than what is happening in the US.’
Schroders commodities product director Matthew Michael expects the US election result to lead to higher US interest rates, stoking the risk of rising inflation.
‘Investors are starting to talk about inflation again, which probably means they will start to behave differently as they try to protect themselves,’ he said. ‘In times like these, greater investment into commodities will probably emerge.’
The investment clock of Royal London Asset Management (RLAM) supports that view. In June, it moved to the ‘overheat stage’ of the global economic cycle, in which growth is strong, inflation is rising and commodities often do well.
Rathbones usually avoids commodities, although it has indirect exposure through Commodity Trading Adviser funds. Managed by computer algorithms, they identify trends in futures markets to generate returns uncorrelated to equity markets.
Recently it looked at putting together a product to offer access to a basket of commodities. These include wheat, livestock, soybeans, and industrial metals such as copper and iron.
‘There’s an outside possibility of an inflation shock in the UK, driven by further sterling weakness due to Brexit uncertainty, which could morph into stagflation if growth collapses,’ said McIntosh-Whyte. ‘Commodities would be an excellent way to help protect our portfolios against this.’
Others are not so sure. RLAM is neutral commodities in its multi-asset funds, preferring to overweight equities.
‘While China’s economy is growing strongly again, commodities face headwinds from oversupply built up during the boom years and dollar strength, reinforced by Trump’s plans for fiscal stimulus,’ said Trevor Greetham, RLAM’s head of multi-asset allocation. ‘Equities, meanwhile, should continue to benefit from an expanding world economy and loose monetary policy.’
Supply and demand
Investment company Architas Multi Manager takes a neutral stance. Its only direct commodities exposure is through the iShares Physical Gold ETC fund. Senior investment manager Solomon Nevins said: ‘The supply side is still ugly given years of overinvestment, though relatively low prices could provide some protection against disappointments.’
Regarding supply, the Organization of the Petroleum Exporting Countries (Opec) struck a deal on 30 November to cut oil production by 1.2 million barrels a day, which if adhered to, should help bring the oil market into balance. ‘Oil is not plentiful enough to merit a $20 price per barrel, but nor is it scarce enough to be worth over $100,’ said Ben Kumar, an investment manager at Seven Investment Management.
He said: ‘This middle ground, where producers eke out a living and consumers see costs of living reduced, may come to be seen as something of a golden age.’