Private-client wealth managers say they are not reducing investors’ exposure to commodities, in spite of the dramatic slump in prices last week.
Wealth managers believe commodities are still worth holding for the long term – but investors are being urged to be careful about the way they gain exposure.
Silver, oil and gold all slid in value last week, prompting some analysts and wealth managers to predict that the rapid rise in commodity prices over the past few months was a bubble that had finally burst.
The S&P GSCI Commodity index has risen 17 per cent in the past six months – outstripping the 9 per cent rise in the gold price. Oil and silver were big drivers of the overall growth, with silver more than doubling its value in the year to the end of April when it hit its peak. But, in the week to May 6, silver fell 30 per cent in value and volatility in the commodity markets has continued this week.
Much of the fall in prices has been attributed to heavy selling by risk-averse hedge funds. While fund managers and analysts have disagreed over the reasons for the falls, they agree that commodities could remain volatile for months to come.
But wealth managers believe that the long-term fundamentals that have driven commodity prices up – the growth of infrastructure in emerging markets and a lack of supply of many metals and minerals – are still present.
“We were always wary that some of the rise in commodities was speculative so we were waiting for a shakeout,” says Jonathan Jackson at Killik. “But, in the longer term, we still like the area because emerging markets need to build infrastructure.”
“The fundamental rationale for higher commodity prices still exists,” agrees John Ventre, portfolio manager at SIG. “Emerging market demand isn’t going away even if it turns out that rising interest rates stem some of the short-term appetite.”
Killik moved its clients’ discretionary portfolios into a neutral position on commodities earlier in the year, but it is now adding to oil, as it believes the price will rise because of supply issues and events in the Middle East.
Some wealth managers are avoiding mining stocks in favour of direct holdings.
“Energy and mining companies, particularly the larger ones, are generally in the business of selling an asset that they are running out of,” argues Ventre.
Dirk Wiedmann, head of investments at Rothschild, thinks the outlook for soyabeans is “particularly bright”. He says: “US supply is set to remain tight while Chinese farmers are reducing their soyabean plantings by 11 per cent this year. We believe corn should also perform very well.” However, he warns: “Threats to biodiversity are putting huge pressures on farming and we expect food prices to become much more volatile.”
Bill O’Neill of Merrill Lynch Wealth Management thinks that, in spite of the downward pressure on commodities this year, an opportunity exists in copper over the next six months because of a shortfall in supply.
“Looking at the copper price charts, it seems to be establishing a base ahead of a resumption of the bull market,” he says.
Those concerned about volatility should consider a fund that can take both long and short positions, says Adrian Lowcock, senior investment adviser at Bestinvest. He recommends the Investec Enhanced Natural Resources. “You add huge amounts of volatility to a portfolio by playing individual commodities,” he warns.
Alan Miller at SCM Private suggests that investors worried about the “contango” effect of exchange-traded commodities – whereby the price of products that track futures contracts can be significantly different to the underlying “spot” price – should consider funds that track diversified commodity indices to spread risk.
These include the Deutsche Bank Liquid Commodities Index and the Lyxor ETF Commodities CRB.