The main action has been cyclical stocks against commodities. The elastic band had surely become too stretched and has snapped back. However, I certainly would not want to bet on banks, hit by the American housing market and surely now sitting ducks for a UK housing crash.
Remember too that sharp corrections in commodities are far from unusual. This century has seen an incredible bull market for the oil price but since 1999 it has had 12 corrections of 20 per cent or more – this is the 13th. Even if oil drops to below $70, oil equities are still going to see earnings’ upgrades.
We should also remember that the recent surge upward in the oil price always looked unsustainable in the short term. At some stage, a price shock of that magnitude is bound to effect consumer behaviour and the price will correct. We have seen evidence of this in America and the UK and also in emerging markets where oil subsidies being reduced or taken off altogether.
People are now saying that with global growth falling, the demand for commodities must ease. On the surface, that seems like a perfectly reasonable conclusion but my own view is rather more optimistic.
Generally speaking, the supply/demand equation is still supportive of high prices. In past global economic slowdowns, we have never seen big demand from emerging markets but now they are generating huge domestic demand for commodities and this cannot disappear overnight.
These nations do not live in a bubble and their economies must surely slow down to some extent too. I do not know how long the pause for breath in commodities will last but, as I have stated in previous columns, I believe we are witnessing a huge industrial revolution which is going to have a massive effect on the world. The Western industrial revolution had a huge effect on the globe and this is far bigger.
One company that has been putting great emphasis and commitment in this area is Investec. It has launched a number of commodity-related funds but I thought I would bring to your attention the one it launched in May – enhanced natural resources.
Investec boasts a resource team of 10 with combined experience of 80 years, headed by Bradley George. Mr George has 12 years experience in this field, having joined Investec in July 2006 from Goldman Sachs.
The fund is co-managed by George Cheveley who joined the team in 2007 as a metals specialist and was previously an analyst for global mining giant BHP Billiton.
The fund can choose from over 800 shares and exchange traded commodities but what makes it unusual in this sector is that it can also short, giving it the potential to profit when prices fall.
The goal behind shorting is to reduce the portfolio’s overall volatility and smooth out some of these big corrections that we see in commodities.
The fund is likely to hold 10-15 commodity positions, that is, the actual commodity itself, and somewhere between 30 and 35 shares.
The commodity itself and the equities do not necessarily move in tandem with one another. The team look very carefully at the supply/ demand situation for each commodity, which helps them in forecasting poten- tial trends.
Alongside this is their equity research, which grades companies on such things as earnings’ estimates, valuation, asset quality, momentum and capital management.
These two aspects of research are put together to highlight areas of opportunities in the market.
The team remain of the opinion, as do I, that commodities, particularly energy, are a massive long- term investment story. Such cycles usually last for around 15 years and, as this one started in 1999, that suggests we could still have a long way to go. However, as with any bull market, prices can still fall – and fall dramatically – along the way.
Those with long memories will recall the stockmarket crash of 1987, which felt like Armageddon at the time but now looks like a mere blip on the charts.
Those who want a more defensive fund may want to consider the Investec enhanced natural resources fund. This got off to a poor start and fell sharply in July. In defence of Messrs Bradley and Cheveley, the extreme volatility seen in the sector would have made anyone’s life difficult. It is too early to say whether the fund will be a success but it is certainly an intriguing concept and one I will be keeping my eye on in future.
Mark Dampier is head of research at Hargreaves Lansdown