Viewpoint: IAMs on the hottest commodities

Supply cuts from Opec and Russia have pushed crude prices back to 2014 levels, and valuations relative to equities look compelling. However, the price of oil will always come down to the most unpredictable of forces: politics.

We asked four independent asset managers whether they are buying the oil story, or whether other commodities now look more attractive given the rise of electric vehicles.

Ronald-Peter Stoeferle


In our opinion, commodities are the antithesis of the US dollar. When the US dollar depreciates against gold and commodities, that creates a global tendency towards rising prices. At the moment, our inflation signal indicates a rising inflation tendency at a signal strength of 50%.

Commodity prices are currently inflation drivers, while the weak silver price (compared with the strong gold price) exerts a dampening effect on the overall signal. Because of these factors, we have increased our commodity allocations.

We are also invested in oil and oil producers because of several factors that support rising oil prices, such as the rising geopolitical tensions in the Middle East and intensified co-operation between Opec and Russia. As far as the oil price is concerned, we remain more optimistic than consensus.

Our investments are based on our inflation signal. According to our statistical analysis, gold and silver are currently our favourite commodities. The relative valuation of commodities in comparison with equities seems extremely low by historical standards. Compared with the S&P 500, the GSCI Commodity index is trading at its lowest level in 50 years and is significantly below its long-term median of 4.16.

If we postulate the general tendency of reversion to the mean,
we may anticipate attractive commodities investment opportunities.

We must also point out a new aspect of the financial markets, one that might turn into a particular blessing for gold. So, what happens if both shares and bonds dive in a bear market? What will be the safe haven, now that the traditional pattern of negative correlation has ended? Will it be cash, property, Bitcoin, or – once again – gold?

We are convinced that in such a scenario, gold will be among the biggest beneficiaries. 

Pablo Gonzalez

Independent Capital Management

We are still bullish on commodities and even more so on commodity-related equities.
The long-term drivers of demand – including industrialisation
and urbanisation – are far from complete in the developing world.
Urbanisation is driving a per capita wealth increase and with it demand for resources. For example, in the next few years, India and China will have more than 1 billion new middle-class citizens.

The Bloomberg Commodity Index is still close to a 17-year low,
and the ratio to the global equity market has never been so low.
Commodities have cycles, and now we are in the adjustment phase where demand and inflation recover, supply tightens and inventory draws. That’s already visible in some commodities.

Crude oil had its recent pullback, with the Opec and non-Opec
oil producers (Opec-plus) stating that they are likely to boost oil
production gradually in the second half of 2018.

On the one hand, Opec wants to ease consumers’ fears, but on the other they do it because the oil market is tight. Inventories are well below five-year averages, and growth in oil demand is strong and has probably been underestimated.

Goldman Sachs estimates that even an increase of 1 million barrels of oil equivalent per day would leave the market in deficit through the third quarter of 2018.

The longer-term oil prices in the back of the curve have either barely moved, or have actually increased. This makes oil and gas equities very interesting because analysts may start to increase their longer-term oil price deck and their price targets.

The stronger focus on capital discipline and profitable drilling will result in companies having better margins in the future than at times when oil prices were above the $100 per barrel level.

Free cash flow yields of energy companies are already higher than
those of the MSCI World index or the S&P 500 index. With record low valuations – absolute as well as relative – we think an improvement in sentiment will come.

For energy exposure, we are invested in the Energy Champions
fund, which has outperformed 90% of its peers so far this year and has a strong North America shale focus. For a more balanced commodity exposure along all commodities, we have the Gateway Natural Resources fund, which invests in commodity futures and commodityrelatedequities.

Marcos Camhis

FOS Asset Management

At FOS Asset Management, our allocations to commodities have
significantly increased over the past four years, with a clear focus on metals, and specifically base metals.

Base metals such as copper, nickel, aluminium and lead are widely used in commercial and industrial applications such as construction, manufacturing and electric batteries, providing a leading indicator of economic activity.

Our allocations in 2015 and 2016 were considered contrarian, when industrial metal markets were at historical lows. The past 12-18 months have seen strong performance in many of our
investments in the metals space, with the S&P/TSX Global Base Metals Index posting a 38% rally in the past 12 months, and 9% three-year annualised positive returns.

The iShares S&P/TSX Global Base Metals Index ETF is one of the tools we used to gain diversified exposure to this space, with other funds offering exposure to the space as well.

Our clients also focus on private equity investments in this space, with a clear interest in long-term investments and turnaround situations. We see particularly interesting opportunities in emerging markets (Latin America, Balkans) as well as in developed markets with assets in need of financing and technical upgrades.

One area we are actively monitoring is the electric car industry and its impact on the commodities market, especially for metals such as lithium, cobalt and nickel, which are used in battery production for electric cars.

Manufacturing electric cars with high driving ranges is fuelling
demand for metals used in the production of the batteries and is rapidly affecting their prices.

Claes Orn

Orn & Cie

The price of crude oil has rallied back to its 2014 level, spurred by geopolitical turmoil and supply cuts from Opec and Russia. Growing concerns in the Middle East and US-imposed sanctions on Venezuela, which is on the brink of collapse, could send prices higher.

Saudi Arabia is also believed to support artificially higher crude oil prices to boost the value of its state-owned oil company, Aramco, which had its IPO delayed because of valuation concerns.

However, sanctions and Opec cuts will not continue forever, and all eyes will now be on the Opec meeting on 22 June. There are just too many geopolitical concerns and uncertainties right now, and we don’t feel confident enough to be in the oil sector. We prefer to look for alternatives.

The transportation industry will undergo a profound transformation in the next decade, shifting from diesel- and gasoline-powered vehicles to all or partially electric. By 2040 Bloomberg New Energy Finance predicts 50% of all new vehicle sales to be electric. That alone would displace 7.3 million barrels
per day of transport fuel.

China is leading the race of the electrification of the transport industry, with more than 300,000 electric buses on the road and 600,000 electric vehicles sold in 2017 alone. All these vehicles need batteries, and batteries contain lithium, cobalt, nickel, graphite and copper, among other minerals.

As the world is shifting away from fossil-fuel-powered transportation, we think investors should pay attention to these strategic raw materials and buycompanies that benefit from this emerging trend.

The Global X Lithium & Battery Tech ETF gives investors exposure to lithiumrelated stocks. High concentration to a few names and limited exposure to cobalt, nickel, graphite and copper is a drawback.

However, we see some more interesting alternatives on the horizon that will capture this rapid disruption and would recommend investors to stay informed.