Raw materials fuel yields: raw materials enter a “supercycle”
As the global economy picks up, commodity prices are skyrocketing. After dropping to negative numbers last year, a barrel of oil is back above $ 78, its highest price since 2019.
Meanwhile, tensions between major oil exporters, including Saudi Arabia and the United Arab Emirates, could see prices rise further.
Non-energy commodities, resources such as copper, iron ore and palladium, have also recovered since the start of 2021.
Crude move: After falling to negative numbers last year, a barrel of oil is back above $ 78 – its highest price since 2019
The trend has led some market watchers to predict a commodity supercycle: a prolonged period of rising prices.
Many investors will wonder if this mini-boom could offer opportunities to strengthen their portfolios.
Of course, the rise in the price of oil has boosted energy stocks – all of which have had a hell of 2020. Shell is now up almost 14% since January, with BP up 27%.
So, what future for oil and other commodities – and for investors?
We are used to hearing about oil prices, but commodity markets are often a mystery to retail investors. But it’s just any kind of raw material that the economy depends on.
In a growing economy, demand for these products increases, as does their price.
When you look at what’s going on in the world, it’s not hard to see why a lot of people expect this to happen.
China (which consumes about 50 percent of many commodities) and the United States have experienced a rapid return to economic growth.
When it comes to investing in commodities, there is one essential difference with most assets.
Unlike stocks and stocks, investors rarely own the actual commodities. Instead, they tend to negotiate contracts that allow them to buy (or sell) an item – say, a barrel of oil – at a fixed price in the future.
If demand continues to rise, they can sell the contracts to someone who wants oil and make a profit.
Strong demand: Non-energy commodities, resources such as copper, iron ore and palladium, have also risen sharply since January
This type of activity is almost entirely carried out by professional traders, rather than by retail investors. But that doesn’t mean DIY investors can’t profit from rising commodity prices, either.
One way is to buy ETFs (Exchange Traded Funds) or ETCs (Exchange Traded Products) based on commodities.
As with equity funds, these essentially buy options on commodities and combine them into a single asset suitable for retail investors. iShares Physical Gold ETC, for example, is a popular option for investors who want some exposure to gold in their portfolio.
And iShares Diversified Commodity Swap ETC invests directly in oil, gas, nickel and aluminum.
The fund has grown by over 25% this year, but its long-term performance is very different.
An investment of £ 10,000 five years ago would only be worth £ 10,062 – a reminder of the cyclical nature of commodities markets.
A more common way to make money from commodities is to invest in relevant companies.
In last year’s Gold Rally, for example, a clear winner was Fresnillo, an FTSE-listed gold miner whose share price rose 70% in 2020.
While the rise in oil prices has boosted Shell and BP for now, their future is not so clear.
“The main obstacle facing the energy majors is the relentless trend towards renewables,” said Richard Hunter, Head of Markets for Interactive Investor.
Black gold: After falling into negative numbers last year, a barrel of oil is now back above $ 70 – its highest price since 2019
But that doesn’t mean the end of energy companies – not least because Shell and BP have pledged to reduce their emissions to “net zero” – but it does create uncertainty.
Before buying these companies, investors want to know how effective and profitable their green transition will be.
Mr. Hunter says that BP’s low-carbon power generation has increased 1% in a year, a good sign for environmentally conscious investors.
And fund manager William Lough, who heads River & Mercantile’s UK Dynamic Equity fund, says there is reason to be optimistic about Shell.
“The company is valued very cheaply in relation to the cash flow it generates, even if the price of oil drops slightly,” he said.
“In the meantime, their transition strategy is less focused on large capital expenditures and more on bringing renewable energies to market. “
Shell plans to become more involved, for example, in the infrastructure for recharging electric cars.
However, BP and Shell remain well below their recent highs: their share price has fallen 40% in two years.
It’s also a mixed picture for mining stocks.
FTSE-listed mining companies Rio Tinto, Anglo American and Glencore are up 9 percent, 17 percent and 30 percent respectively since January. Their prices have been volatile, however, often dropping 4% in one day when commodity markets falter.
The low values of energy majors and mining stocks mean they appear in equity funds – often those focused on value investing.
River & Mercantile UK Dynamic Equity, for example, has stakes in Shell and Anglo American.
£ 10,000 invested in the fund five years ago would now be worth £ 14,800.
Artemis SmartGarp UK Equity supports the two energy majors as well as three large mining companies of the FTSE.
The same investment of £ 10,000 would now be worth £ 16,900. If oil prices maintain their momentum, both should benefit.
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