For most of the past decade, commodities have been ignored. However, commodities are now heating up again as investors seek assets in the market that can withstand re-inflation.
Investors at U.S. asset manager Point72 and Pacific Investment Management’s Pimco both expect commodity prices to move higher. Wall Street leader Goldman Sachs also expects a new bull market in commodities, saying its impact on the economy will be comparable to the China-driven boom of the first decade of this century and the oil price spike of the 1970s.
Robert Howell, senior research strategist at Gresham, a U.S.-based asset management firm focused on commodities, said.
“We are very confident that the fundamental conditions are in place for a new structural bull market (i.e., a bull market brought on by asset revaluation in specific sectors and specific companies). If they don’t take advantage of this opportunity, investors may look back at 2020 in the future and wonder how they didn’t spot these signs of a new bull market in commodities.”
Commodity prices have now risen from their lows this spring. Copper, iron ore and soybean prices have soared to their highest levels in more than six years, driven by a major Chinese buying spree.
Not only China, but macro investors around the world have jumped on the commodity bandwagon, seeing commodities as a bet on the global economic recovery and a hedge against future hyperinflation.
Commodities are typically cyclical assets that rise and fall in tandem with the global economy. This makes them the first to benefit from the economic recovery brought about by vaccine distribution.
Evy Hambro, head of sector investments with $16 billion in assets under management at U.S. investment manager BlackRock, said.
“We are optimistic about commodities overall because global economic growth and inflation will support commodity prices.”
Nic Johnson, who manages about $20 billion in commodity-focused funds, also believes commodities “will benefit from a wave of global reflation.
In the decade between 2011 and now, investors have been buying commodities in droves as commodity prices soared.
But since then, they have turned bearish on commodities, and many well-known commodity hedge fund firms have exited the market, including Astenbeck Capital Management, Blenheim Capital Management and Clive Capital, which managed billions of dollars in the heyday of commodities investing.
And now, investor enthusiasm for commodities suggests that an asset that has been underappreciated for years is back on investors’ radar.
In a year when the hedge fund industry as a whole has seen an exodus of capital, commodity hedge funds have managed to attract inflows. According to eVestment, as of October, commodity hedge funds have attracted over $4 billion in inflows, while the hedge fund industry as a whole has seen $55 billion in outflows.
Fund managers are increasingly interested in commodities. Don Casturo, chief operating officer of commodities at Goldman Sachs, founded the commodities-focused Quantitative Fund (Quantix Commodities) in 2018.
Once the fund was created, Don Casturo said he called asset managers he knew who were interested in commodities.
“The economic cycle that has been so favorable for the stock market and fixed income is coming to an end, and people are looking for alternatives to the stock market and fixed income.”
Don Casturo said Quantix’s long-short commodities fund attracted only $50 million in capital at the start of 2019, while the fund is now $620 million in size and has returned slightly more than 15% so far this year. He also said Goldman Sachs will launch a long-only “inflation-indexed” fund in February.
In addition, other commodity-related funds have also performed strongly. Discretionary Enhanced Fund, a fund managed by Pierre Andurand, a hedge fund manager specializing in the oil market, rose 152.2% in the year ended Dec. 11, according to people familiar with the matter.
However, not everyone is explicitly bullish on commodities for the following reasons.
First, the upward price spiral in commodities has been going on for a long time. Pacific Investment Management’s Johnson said he was “very optimistic” about U.S. natural gas expectations, but he was not optimistic about agricultural commodities because they will not move higher unless there is a significant reduction in crop production in the Southern Hemisphere.
Analysts at JPMorgan Chase warned last week that China’s credit cycle has peaked, and predicted that base metal prices will be lower next year.
Second, they believe the global economy will remain undercapacity for the next few years, so there is no need to worry about rising inflation.
In response, the bullish commodity advocates offer a rebuttal.
Don Casturo believes that the bullish trend in commodities is still in its infancy. He points out that about $130 billion has flowed out of the commodities sector over the past few years.
In addition, many expect stimulus packages targeting the electrification of transportation and the growth of renewable energy to boost demand for metals.
Further, in the commodities sector, the supply of commodities may be constrained as years of low prices force producers to cut spending. This is most evident in the oil industry. In April, oil prices plunged below zero, and coupled with investor pressure, large companies in the oil industry have cut spending.
The Energy Opportunities Fund of British Capital Management (westbeck capital management), which rose 63.6 percent in the year to November, is headed by Jean-Louis Le Mee and Will Smith, who said.
“Oil and oil stocks remain the only inflationary re-inflationary assets that have fallen sharply year-on-year.”
They believe the laws of capital and the focus on generating free cash flow will “soon resonate with investors and drive a new bull cycle in the oil sector.”
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