Columbia Threadneedle EMEA CIO and global head of equities Mark Burgess has increased the commodity exposure across various funds at the asset manager, believing it is undervalued and is a good “catch-up” play.
Burgess says the manager has increased exposure to precious metals, minor industrial metals such as lead, zinc and nickel, and oil, believing they are facing a drop in production and a rise in demand. On average the asset manager has increased the commodity exposure by around 1 per cent on various multi-asset and managed funds, including the £267.1m Dynamic Real Return fund.
“In our view, we are now at the point where the supply/demand dynamic is rebalancing across commodity sectors, including the base metals markets,” he says.
“At a broad level commodities rallied from 2000 to 2008, driven by the rapid industrialisation and urbanisation of China, but as the pace of this levelled out commodities entered a bear phase and now almost every commodity is trading below its 15-year median trading level, aside from gold, coffee and cotton. Energy in particular is trading well below its median level,” he says.
He adds that since 2012 mining companies have reduced capital expenditure by 90 per cent, which has taken time to filter through the system but is now being seen.
A similar case has been seen in the oil industry, with a drop in the price of oil leading to a cut in production.
“To put today’s oil market dynamic in context, during the oil bear market of the 1980s there were up to 15 million barrels per day of spare capacity and we were only consuming 60mbpd [million barrels per day] globally. Now, on a global basis we are consuming around 95mbpd and there is only around 1mbpd of spare capacity,” he says.
“Therefore, in our view a reversion to a $30 oil price would require an unforeseen collapse in demand – at a time when demand for oil continues to be revised higher as consumers react to the lower price environment. Emerging markets are key drivers of this demand.”
Despite gold rallying so far this year, with many investors using it as a safe haven asset amid lower rates, Burgess thinks the asset has further to go.
“Our world of extraordinary monetary policy and negative interest rates is new territory for many investors and so we do not envisage demand falling; instead we see it benefiting as part of a broadly-based commodity rally,” he says.