A variety of major commodity-linked investment indices have gone on a clear upward trajectory over the past three months, nurturing hopes that a long-running bear market is about to end. This is reflected in the performance of the CF Canlife Global Resources Fund, which rose by 38% during the three months to April.
However, while fund manager Benoit Gervais acknowledges this as a sign of a recovery in the commodities world, he still advises caution for the moment. He believes that retail investors seeking a longer-term investment play of five to 10 years to boost their portfolios should carefully consider their options before jumping onto the bandwagon.
“We are starting to see green shoots when it comes to inflation, particularly in the US, and we think that will spread to the rest of the world, where we are reaching levels of capacity utilization and labor demand we haven’t seen since 2007,” he says.
According to Gervais, the recovery in the commodities sector thus far this year is largely due to a turnaround in the performance of the US dollar. “A rising dollar was not going to help anybody, and that is what switched. What we have not seen yet is the proper follow-through in Europe or in emerging markets of a better economy.”
Another tailwind is the fact that supplies of certain key commodities, such as oil, copper, nickel, and gas, are declining. “We just need demand to continue doing what it’s doing,” says Gervais. “Oil demand is very good and thanks to low prices, people are driving bigger cars. Copper, which is a broader measure when it comes to demand for commodities, has not yet picked up.”
This nascent recovery in commodities presents a ripe opportunity to invest in cyclical stocks. But Gervais points out that major risks, such as a major debt problem in China, are hindering chances of a long-term take off.
Investors interested in hitching onto a long-term recovery are therefore advised to wait for the next recession, which the CF Canlife fund manager expects in 2018. “That would be when to make the big long-term buy,” he predicts.
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