Commodities are proving robust in the light of the global economic slowdown, according to John Hathe...
Commodities are proving robust in the light of the global economic slowdown, according to John Hatherly, head of global analysis at M&G.
Expectations for a negative third quarter would suggest that commodity prices should deteriorate but although they are off the top they are still performing well, he says.
Graham Birch, head of natural resource funds at Merrill Lynch, agrees that the overall basic resources industry is looking good. He does warn investors, however, to be focused on specific stocks as not all companies will behave the same.
He adds that Merrill Lynch puts a big emphasis on looking at currencies as commodities are priced in dollars, and the US currency is currently very strong. He cites gold as an example of an asset that looks a poor performer on US markets but is actually doing well elsewhere and is simply misrepresented as the dollar is so high.
He says: "For this reason we would rather invest in a gold company in a country with a much weaker currency."
According to Birch, in an uncertain environment investors will steer clear of equities, bonds and cash and move to stocks with physical assets, such as gold and platinum.
He says: "Platinum prices have been steadily increasing and the volatility in gold markets means very high returns can be made."
Hatherley is a firm believer that resource companies are becoming more efficient and are able to cope with growing demand. In addition he sees evidence they are becoming more consumer friendly.
The Merrill Lynch World Mining Trust is quite diversified with investments in copper, aluminium, zinc and iron ore, Birch says. He favours the base metal aluminium as the US is a large producer and is in the middle of an energy crisis.
He says: "The price of industrial electricity is very high. Aluminium is a great consumer of electricity. This is good for the aluminium industry as it means there will be shortages, which will help the price to rise."
The sector does face a softening of demand but most companies are optimistic, Hatherly says. He also cites mining as an industry that is seeing good performance and is experiencing a large amount of consolidation. "Mining companies are also more reluctant to throw money at uncertain projects and their discipline is to take much more of a shareholder return outlook," he says.
The earnings outlook for mining shares is very transparent and is looking good for the market. Birch says: "This means bad surprises are limited and investors have confidence in the near-term outlook."
Oil and oil field services are also looking positive, says Birch. "Opec is keeping a tight grip on the market through production cuts. If they can hold oil prices in the $20 per barrel area, then a strong year will follow in terms of cashflow and profit earnings," he says.
The price of bulk commodities, such as coal and iron ore, are also recovering this year. Birch adds: "Despite a slowdown in the US there is earnings growth to be seen in coal and iron ore."
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From 1 April 2019