Commodities Back In Fashion As Consumers Get Ready For Boom

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We very much believe that the fundamentals are now in place for a new, structural, bull market to begin,” said Robert Howell, senior research strategist at Gresham Investment Management LLC, the commodities-focused unit of Nuveen with $5.8 billion in assets in the sector. “In the years to come, it’s highly probable that a great many investors will look back on 2020 and wonder how they missed these signs of a new commodity bull market.”In the years to come, a large number of investors will likely look back on 2020 and wonder how they missed those assets.

Prices jumped from their low point in the spring. Copper, iron ore, and soya beans have risen to their highest levels in more than six years, fueled by the Chinese purchasing spree.

But Chinese importers are now being joined by foreign macro funds, drawing commodities as a gamble on the recovery of the global economy and a hedge against the possibility of high inflation.

Commodities are stereotypical cyclical commodities, rising and falling in step with the global economy. This places them first in line to benefit from the regeneration that might be caused by virus vaccines.

Overall, we are optimistic about commodities, as the recovery of global economic growth and the likelihood of higher inflation could boost rates,” says Evy Hambro. She helps oversee $16 billion as Global Head of Thematic and Sector Investment at BlackRock Inc.

Nick Johnson, who oversees about $20 billion in commodity index assets and a separate hedge fund at Pimco, claims commodities will benefit from the global reflationary trend. Enthusiasm is a turnaround for the asset class that has been unloved for years. Although investors poured into things as prices increased in the decade to 2011, they’ve been souring the sector since then. Many of the largest commodity-based hedge funds originated from the markets—including Astenbeck Capital Management, Blenheim Capital Management, and Clive Capital, which controlled billions of dollars at its peak.

Enthusiasm is a tipping point for the asset class that has been unloved for years. While investors poured into commodities as prices rose in the decade to 2011, they have been grieving the sector since then. Many of the most significant commodity-based hedge funds emerged in the markets, including Astenbeck Capital Management, Blenheim Capital Management, and Clive Capital, which managed billions of dollars at its height.

Fund managers are now seeing rising demand. Don Castro, who formed Quantix Commodities as a branch-focused boutique in 2018 after serving as Chief Operating Officer for Products at Goldman Sachs, says he began to call fund managers he already thought had an interest in the asset class.

Now we’re listening to incoming calls—people who have agreed that resources are interesting are finding us,” he says. “The climate that was generating such a favorable tailwind for equities and fixed income is coming to an end, and people are searching for alternatives.

Quantix’s long-running commodity fund, which began with $50 million in 2019, now has $620 million under control and has earned just over 15% this year, he says. The business launched a long-running inflation tracker in February.

Others have had a good performance: the oil merchant Pierre Andurand’s Disposable Improved Fund increased by 152.2 percent in the year to Dec. 11, according to a person familiar with the matter.

For one thing, rates have already gone a long way. Johnson of Pimco says he is “most positive” regarding U.S. natural gas but does not expect agricultural prices to increase unless there is a significant drop in crops in the Southern Hemisphere.

Analysts at JPMorgan Chase & Co. cautioned last week that the Chinese credit cycle had already peaked and expected lower base metal prices throughout 2021. And while some fear increasing inflation, others see no reason for alarm, arguing that global economic growth will remain below potential for years to come.

Capital constraint

However, the commodities bulls have other arguments in their armory. Castro of Quantix claims that the transition of commodities is only in its infancy, pointing to some $130 billion in passive investor capital abandoned by the market over the last few years.

Many foresee stimulus packages promoting transport electrification and the rise of green energy to fuel demand for metals. Through the commodity market, production could be limited because several years of low prices have pressured suppliers to slash spending. Nowhere is it more accurate than in the oil sector, where the combination of price drop below zero in April and investor pressure forced top firms to cut investment.

Oil and oil equities remain the only reflation asset that is down big year-on-year,” said Jean-Louis Le Mee and Will Smith, who run the Westbeck Energy Opportunity Fund, which rose by 63.6% in the year through November. In a recent letter to investors, they argued that capital discipline and a free cash flow focus would soon resonate with investors while turbocharging.




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