If the global economy is beginning to recover then commodity prices should bounce back. This will throw up some profitable investing opportunities.
Boosted by government intervention on a massive scale, the world's economies seem to be shaking off the nightmare of the last eighteen months. Most obvious is the case of China, where the latest GDP predictions are of a 7% annualised growth rate for the second quarter of the year.
And the first concrete signs of that recovery are becoming apparent in commodity prices, which yesterday hit their highest level in six months. Bolstered by rises in oil, metals, agricultural and other commodity prices, the S&P GSCI commodity index -- a representative 'basket' of raw materials -- reached its highest level since mid‑November. On the year, it's up a third.
Apart from oil, industrial commodities -- mainly metals -- are where the action is. Copper prices are at a six‑month high. Lead, zinc, nickel, steel: spurred by growing demand from China and other Far Eastern economies, markets are no longer in meltdown. Even the Baltic Dry freight index has risen sharply, a sign that ships are again starting to be laden with minerals.
How can investors benefits from this? There are three obvious ways to exploit a resurgent natural resources sector:
- Buying into individual mining companies, preferably large and diversified ones, not AIM-listed specialists which could implode
- Buying into resource-heavy investment funds
- Buying specialist commodity-based Exchange Traded Funds
Each has their merits -- and drawbacks -- which I'll discuss below.
Buying individual shares
The London stock market is home to three of the world's mining giants -- Rio Tinto (LSE: RIO), BHP Billiton (LSE: BHP), and Anglo American (LSE: AAL) -- as well as a number of smaller but still significant ones, among the largest of which is Vedanta (LSE: VED). To varying extents, the share prices of all four companies are up on the lows they reached a few months back, but equally far short of the prices they reached at the height of the boom.
That said, these are individual companies, with all that this implies in terms of risk, despite their massive size. Anglo-American, while diversified, is heavily exposed to South Africa and diamond mining. Rio Tinto is laden with debt, and controversially hopes to sell a chunk of itself to the Chinese. BHP Billiton is well diversified, but heavily dependent on Asian markets. And so on.
Resource-rich investment funds
The Fool isn't a huge fan of investment funds. As we've said time and again, index trackers and broadly-diversified baskets of individual shares are usually a better bet. But there's a case for making an exception in the case of specialist investment funds, especially those dealing in sectors like natural resources.
Yes, the downsides of funds still apply -- notably the charges. But in return for those fees, you're getting specialist managers, more research than it's possible for the typical private investor to realistically undertake, and access to stock markets other than in the UK.
For investors seeking a resource-rich investment fund, Mark Dampier at Hargreaves Lansdown has three suggestions: the BlackRock Global World Mining fund, JP Morgan's Natural Resources fund, and First State's Global Resources fund. Indeed, the latter two are among Hargreaves Lansdown's 'Wealth 150' selection of funds -- its 'top 150' among the 2,000 or so funds that it covers.
BlackRock "has an enormous team researching commodities, with an excellent long-term track record," says Dampier. Long-serving JP Morgan fund manager Ian Henderson "is small-cap oriented," while First State prefers larger-cap plays.
Exchange Traded Funds
Exchange Traded Funds (ETFs) are gaining in popularity, and are often a lower-cost way to get many of the advantages of a specialist investment fund.
While cheaper, they do have a downside: as baskets of shares designed to track an index, there isn't the same level of (hopefully) high-quality specialist research that an investment fund manager can bring to bear.
I don't like specialist ETFs focusing on single commodities such as gold -- these are far too risky for my tastes. However, the major ETF providers, notably iShares, do offer such ETFs.
Instead, I prefer ETFs such as the iShares S&P Global Materials Sector Index Fund (MXI), which is 54% invested in metals, 36% in chemicals, with the balance spread across construction materials, paper and packaging.
Another ETF to look at is the Lyxor Commodities CRB Non‑Energy ETF (LCNE), which tracks the Reuters/Jefferies CRB Non‑Energy Index, containing 15 commodities across five major sectors -- base metals, precious metals, livestock, grains and 'soft' commodities.
Are we heading for a global recovery? No one knows. But the signs are promising, and as the real economy picks up, demand for natural resources will once again pick up. Investing in the natural resources sector is riskier than your average index tracker, to be sure -- but is likely to offer greater rewards.
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