Commodities: a compelling 2016 investment opportunity?
The commodities sector looks set to offer one of 2016’s most compelling investment opportunities, according to industry experts.
While the alternative asset class has not been strong in recent months due to a drop in oil prices and sugar, with copper and gold also falling, it looks as if 2016 could be the year that the sector rises once again, with investors finding it increasingly attractive. Experts are advising that investors make the most of the multiple entry points into the sector, which should then generate strong medium-term return opportunities.
Mohamed El-Erian, chief economic adviser to Allianz and chair of President Obama’s Global Development Council, told the Financial Times that the construction of an investment portfolio was crucial when buying into the commodities sector, with the design of solid investment vehicles being as important to success as the selection of the right assets in the first place.
As market forces begin to recalibrate after a difficult 2015 for commodities, industry experts are predicting a multi-year recovery, with great potential for high returns if the investment vehicles selected are robust.
Investors could look to gain from investment vehicles that have been designed to maximise capital leveraged over time into distressed opportunities that come complete with medium-term exit strategies. Ideally, these investments – which could include opportunities within the mining or energy sectors – would be funded by longer term capital. Gold and copper mines are both distressed and eager for investors to revive them with a cash injection. As well as gathering far too much debt when the going was good, many mines were extremely slow in slashing their cash burn rates – this combination now puts them in a position where they are potential opportunities for investors hoping to cash in on asset classes at the bottom of their game.
Investors should look to focus on single-asset opportunities in the aforementioned sectors, aiming to spread them across a diversified portfolio of investments with numerous asset classes. This would ensure that the single-country risk element was taken out of the equation.
It is believed that this investment into distressed assets would help to stabilise and strengthen the entire commodities sector over time, in turn offering increased opportunities to those investors who are not willing to jump in at this point in time. Investors should take a medium-term approach to injecting money into the commodity sector, with as much of a focus on the investment vehicle being used as on the actual opportunity.
A numbers major players are investing into the asset class is on the rise once again – US hedge fund manager Stanley Druckenmiller ploughed $323 million into gold, which now represents the biggest position in his family office fund. This investment came as gold languished around 10 per cent lower than its usual level, unable in the most part to entice in investors due to a combination of unpredictable asset class correlations and concern over central bank policies.
Other major investors include the US-based George Soros, who recently ploughed $2 million into coal producers Peabody Energy and Arch Coal and Carl Icahn, who purchased an 8.5 per cent stake of copper miner Freeport-McMoRan.
Swiss investor Marc Faber told Bloomberg TV that investors should once again consider looking to the commodities sector, saying: “If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.”