Long-Term Commodities Will Boom
Due to a slowdown in Chinese and world GDP growth, commodities funds have been through a rough patch. Industry favourites JPM Natural Resources, First State Global Resources and Smith & Williamson Global Gold & Resources are all down by at least 23 per cent over in 12 months. But FundExpect.co.uk's expert - Brian Dennehy is in the opinion that the recent performance is just a mere glitch. He accepts that Chinas disassociation away from communications and leading towards consumption will have an unfavourable influence on the sector, he believes there are still many reasons to invest in these funds.
"The result of a fall in Chinese demand is an oversupply in commodities and consequently a fall in prices. According to a recent report in the Financial Times, Chinese consumers of thermal coal and iron ore are already defaulting on agreed contracts. However, commodities are not a homogeneous group of assets - when some fall others can rise. Moreover, as demand evolves so will the commodity market. As China moves its economy from infrastructure spending to consumer demand, demand for iron ore will likely fall and demand for commodities such as potash, used for fertiliser, will increase. At the moment China counts for less than 20 per cent of the world's potash demand." Stated Dennehy.
He believes the next surge in the sector will be driven by other emerging economies that together dwarf China, and that more opportunities will present themselves.
He continues "India for example, is some years behind China in its development," he explained. "The country contains 25 per cent of the world's population under 25 and there are just 10 cars per 1,000 people. By comparison, China has 22 cars per 1,000 people, and by 2025 nearly 28 per cent of China's inhabitants will be aged 55 or older. It's also important not to forget the volume of people that aren't in China and India; over one billion people live in the sweep of territory from Russia in the north, south through Turkey, the Arabian Peninsula and on through Africa to the Cape of Good Hope."
Temporarily, Dennehy thinks commodity prices and fund returns are likely to go down more, but he is poised to strike once prices get too low to ignore.
"Now is not the time to be bottom fishing, as we believe commodity prices will fall further before the next boom begins, our analysis suggests a downside of perhaps as much as 30 per cent from current levels, but we are building a shopping list now, preparing for an outstanding opportunity from those lower levels." He said.
He adds that companies such as M&G Global Basics, Artemis Global Energy, JPM Natural Resources and BlackRock Gold & General are his favoured picks in the sector.
"M&G Global Basics is run by Graham French, arguably the most successful fund manager of the last decade, he invests in first-world companies growing their profits in third-world countries through the supply of goods, services and basic materials."
"The result of a fall in Chinese demand is an oversupply in commodities and consequently a fall in prices. According to a recent report in the Financial Times, Chinese consumers of thermal coal and iron ore are already defaulting on agreed contracts. However, commodities are not a homogeneous group of assets - when some fall others can rise. Moreover, as demand evolves so will the commodity market. As China moves its economy from infrastructure spending to consumer demand, demand for iron ore will likely fall and demand for commodities such as potash, used for fertiliser, will increase. At the moment China counts for less than 20 per cent of the world's potash demand." Stated Dennehy.
He believes the next surge in the sector will be driven by other emerging economies that together dwarf China, and that more opportunities will present themselves.
He continues "India for example, is some years behind China in its development," he explained. "The country contains 25 per cent of the world's population under 25 and there are just 10 cars per 1,000 people. By comparison, China has 22 cars per 1,000 people, and by 2025 nearly 28 per cent of China's inhabitants will be aged 55 or older. It's also important not to forget the volume of people that aren't in China and India; over one billion people live in the sweep of territory from Russia in the north, south through Turkey, the Arabian Peninsula and on through Africa to the Cape of Good Hope."
Temporarily, Dennehy thinks commodity prices and fund returns are likely to go down more, but he is poised to strike once prices get too low to ignore.
"Now is not the time to be bottom fishing, as we believe commodity prices will fall further before the next boom begins, our analysis suggests a downside of perhaps as much as 30 per cent from current levels, but we are building a shopping list now, preparing for an outstanding opportunity from those lower levels." He said.
He adds that companies such as M&G Global Basics, Artemis Global Energy, JPM Natural Resources and BlackRock Gold & General are his favoured picks in the sector.
"M&G Global Basics is run by Graham French, arguably the most successful fund manager of the last decade, he invests in first-world companies growing their profits in third-world countries through the supply of goods, services and basic materials."
