Investors daring to have confidence in commodities sector once again
The outlook for the commodities sector could finally be beginning to look more positive following five years of annual declines – and investors are indeed drifting back into the sector.
According to Barclays' latest research, the commodities sector enjoyed a solid pattern of investment inflows between January and August of this year, with levels sitting at £54 billion. This figure marked an all-time high for that time period, the bank said, adding that if the trend were to carry on it that vein, this year will see the first year of net investment inflows into the sector for the first time in four years.
Kevin Norrish, head of commodity research at Barclays, told the Financial Times: "We think that this is a turning point in investment flows in commodities." Mr Norrish went on to say that making the most of the uncertain economic climate has become the new trend, with many investors keen to benefit from the volatility that exists in individual commodities, such as gold.
So far this year, the precious metal has proven to be the single most popular commodity investment, with investment inflows into "physically backed exchange traded products" reaching a net $27 billion. This figure is particularly impressive following three years of net outflows from gold exchange traded products and sits way ahead of the previous record high that was set back in 2009, the Financial Times reported.
Many investors are still viewing commodities as a diversification and inflation hedging asset class, with index linked products proving to be particularly popular. Indeed, it has been suggested by industry experts that this year could be the first year to see net inflows into commodities indices-linked investments in four years, meaning that, as Mr Norrish put it, “long-term investors are getting involved again."
Investors are looking to a host of positive signs regarding the sector, all of which are boosting their interest, such as the total return on roll yields and collateral yields sitting at seven per cent, compared to a nine per cent total return for global bonds and a 6.4 per cent increase for the S&P 500.
Interest is also spiralling into other arenas, as portfolio manager at Investec Asset Management, George Cheveley, told the newspaper: "We are seeing inflows and more interest in our resource equity funds, particularly in the Investec Global Gold fund.” Mr Cheveley added that miners are also enticing in investors in their droves. "They have reduced debts and are generating cash. The coking coal and manganese price spikes, better than forecast iron ore markets, the tightness in zinc concentrates and speculation of more nickel cuts — all these moves are attracting investors’ attention,” he went on to say.
Despite all of the positivity starting to surround the sector once more, questions remain over whether these new investment inflows will be a flash in the pan, or are sustainable. Some industry experts feel that, while oil and gold may have already reached their 2016 high and have already realised their best gains, other assets including sugar, coffee and natural gas could well continue to enjoy strong rises.
In terms of oil, the international crude marker Brent saw a rise of 23 per cent recently from the beginning of the year, boosted by the chance of Opec and central non-Opec countries making output cuts. Despite this impressive rise, however, oil has not yet managed to sustain pricing of more than $50 per barrel. Overall, the star performer this year in terms of commodities has been coking coal, which has seen a stratospheric rise of 160 per cent thanks to ongoing strong demand from China coupled with limited supplies.