The major investment story of 2015 so far has been the heavy deterioration in commodity markets. Signs of escalating economic cooling in China have been the main culprit behind the steady decline, although an array of other factors — from fears of another financial blowout in Greece through to the impact of Federal Reserve tightening — have also dented risk appetite.
Not surprisingly, the FTSE’s major listed miners and energy producers have been the main casualties as investors have pulled their cash out with alarming urgency. Of the top 10 FTSE 100 losers of the past six months, half of these are involved in the mining and refining of metals and the production of oil, led by diversified giant Glencore which has sunk more than 60% in the period.
And this downtrend is not set to cease any time soon, in my opinion. Bellwether metal copper remains perched just above the six-year lows of $4,880 per tonne struck in August, while the Brent crude benchmark is sinking back to the multi-year troughs below $50 hit in the same month. With demand indicators continuing to disappoint, and resources producers belligerently hiking their output, I believe fresh price plunges are an inevitability.
Commodities on the charge
However, it would be a gross oversight to steer clear of the entire commodities space, in my opinion, as plenty of investment opportunities remain.
Uranium prices, for example, have risen healthily during the course of the year thanks to strong nuclear power generating capacity growth in the US and China. On top of this, nuclear reactor restarts in Japan have provided another critical driver for uranium values, and I expect demand to continue rising as lawmakers the world over move to cut carbon emissions, a positive signal for the nuclear industry.
Elsewhere, sugar prices have exploded in recent months thanks to healthy off-take from the ethanol sector and the effect of adverse weather patterns on crop harvests. Indeed, the sugar content of cane in the sugar heartlands of Brazil are currently at their lowest for a decade.
And looking at the battered metals markets, I believe palladium should recover further from the five-year troughs struck in 2015. Thanks to the ever-present problem of supply outages in South Africa; chronically-low inventories; and the impact of growing global car demand on palladium-loaded autocatalysts, I believe the stage is set for metal prices to rally.
Stocks vs ETFs
So how can one tap into the lucrative world of commodities? Well, one familiar route for many would be through investing in companies with direct exposure to the commodities in question.
But this can often be a problematic route. Palladium producer Lonmin, for example, has seen its share price collapse in 2015 as fears over the future of the diesel engine — and consequently platinum demand — has weighed on investor sentiment. And Lonmin has numerous other factors to contend with, too, from rising costs and production stoppages through to the obvious hit-and-miss nature of minerals exploration.
A more direct way to gain exposure to individual commodities is by buying into exchange-traded funds (or ETFs), investments that track the price movements of the relevant asset. The ETFS Physical Palladium, for example, is one of many such vehicles that can benefit from solid price rises. And investors can plough in a wide range of similar assets that tune into a wide array of other commodities, from hogs and wheat right through to tin and cocoa.
And bearish investors can also ride the ETF train by opting to go ‘short’ on certain commodities, a strategy that can be executed by buying the likes of ETFS Short Copper, a vehicle that moves inversely to the metal price. So as global copper capacity ramps up, and Chinese export activity remains in the doldrums, I believe this vehicle could pay off handsomely in the months and years ahead.