Commodity prices, as well as share prices have been hit by the uncertainty surrounding the forthcoming European Union referendum.
But Neil Gregson, fund manager of the Bronze-Rated JP Morgan Natural Resources fund said on Tuesday that if Britain does vote to exit the EU, this won’t necessarily have a significant impact on commodity prices in the longer term. But he does say that in the short term this could be an interesting buying opportunity for investors.
“We will be looking for dislocations in terms of share prices in the days following the vote, should Britain leave the EU. For example if Rio Tinto (RIO) gets sold off heavily because of wider sell-offs in the FTSE then this might be an opportunity for us. But we really expect little impact in terms of the broader commodity space,” he added.
Lower Gold Weightings
One possible beneficiary of a Brexit might be gold. Gregson thinks that gold prices could rise slightly, although much will depend on the outcome of the vote. He and his team continue to hold gold although they have lowered their weightings in gold more recently.
“Valuation of the gold sector has become stretched, given that the price has moved so fast this year,” said James Sutton, a client portfolio manager on the same fund, “However we still retain exposure to gold as we think we are going to be in a low interest rate environment for a long period of time, and that will be a support environment for gold.”
Any rally in gold price should have a positive effect on companies that mine and produce gold.
“As the gold price goes up, their earnings go up at a higher rate. So they have good leverage to gold and you should get a better performance through the gold equities in a positive market,” said Joe Foster, manager of the Lombard Odier World Gold Expertise fund, talking earlier today to Morningstar.
Share prices of gold equities therefore echoes companies’ growth in earnings. When gold prices were up 15% from January to May in 2016, there was a corresponding 72% growth in share prices of gold equities, according to data provided by Sutton.
However, Rob Marshall-Lee, head of emerging markets at Newton Investment reminded investors that companies that produce gold are good as short-term trading stocks but are not necessarily “buy and hold” stocks.
China Will Benefit Commodities
Sluggish manufacturing data from China - as well as the renewed weakness of the renminbi – has unnerved commodity investors, fuelling concerns over the country’s demand for raw materials. However Sutton believes that commodities can be benefit from a shift of consumption in China.
“This sector is not just about steel and coal. There is another angle to it, such as gold, diamonds and cooper. The can from another leg of growth driven by consumers in China,” he says.
Sutton says that the growth in the production of electrical vehicles is a good example of how this consumer-driven trend stimulating demand for cooper- as the use of cooper is 20 times greater in electrical cars when compared to conventional vehicles.
Commodity Sector Looking More Positive
Sutton says the commodity sector is “getting fairly positive”, buoyed by rising oil prices and a slightly weaker US dollar.
“As oil prices have started to move higher, this has improved sentiment across the sector,” Sutton said.
“We are seeing upgrades in terms of earnings and profits from companies,” he said, reminding investors that there would be some volatility along the line but “we’ve had very significant rallies on the road”.
Not Holding Anglo American
Sutton said the JP Morgan Natural Resources fund is currently overweight in base metals and the oil and gas sectors. However, in terms of specific companies, he said that they are not holding Anglo American (AAL) at the moment as they feel it still faces a number of headwinds.
The JP Morgan Natural Resources fund has lost 35% in 2015 due to the fall of commodities prices however it has gained 30% year to date.
