Are we finally close to the turning point in at least some of the commodity markets? Looking through some of the longer term charts that I track on a regular basis throws up some interesting observations. Several key commodity indices are now either close to or around the lows that they reached at the height of the global financial crisis in 2008. If you believe in a Biblical approach to investment, with seven year cycles of feast and famine, this is at least an invitation to keep an eye open for the point when prices finally start to rally.
My experience is that it rarely pays to try to call the bottom of this kind of multi-year cycle precisely to the day, but you do need to be vigilant to watch out for longer term value opportunities once a cycle has turned and has begun to demonstrate sustained upwards momentum. Clearly we are not there yet, but as we have reached a point which might logically become the floor, it is a good moment to pay attention to the next few months’ price action. If current price levels are breached, it means the bear market goes on; if not, there may well be sizeable gains to be made.
Here for starters is the chart of the Rogers International Commodities Index, a better guide to overall trends in commodities than the better known CRB index, which is dominated by oil.
Of the various components of the index, closer examination shows that it is the agricultural commodities which ave taken the worst hit, followed by energy. The latter remains the most unloved sector amongst fund managers, and the degree of aversion has rarely if ever been higher, according to the latest BofAML survey. Metals by contrast, with the exception of the industrials, copper and iron ore, have held up relatively well (which is not saying much however). The oil price has historically tended to be the first commodity price to move, with metals in its wake so will be, as always, the first place to look for a lead. While it takes several years for the effect of cap ex and supply cutbacks to work their way through and restore balance to the physical market, the financial markets always anticipate the outcome some time in advance. Prices will have to hold above the $40/barrel level for some time before we can be confident that the oil market has bottomed out.
Next take a look at the chart of Blackrock World Mining Trust, the most widely held commodity-based investment trust in the UK investment trust sector. The chart shows that is still around 10% away from its 2008 low in share price terms, but actually below those lows if you look at its net asset value. (It is of course fair to observe that NAVs tend to lag the underlying value of a mining portfolio in any bear market). The ineresting thing about the Blackrock trust, and its sister open-ended fund, is that the dividend yield is now more than 9%. More than 20% of the fund is invested in just two stocks, the industry giants BHP Billiton and Rio Tinto, both currently trading on a prospective dividend yield of around 7%.
The directors of the trust said in their last interim report and accounts that it was prepared to dip into reseves to sustain its final dividend in the current financial year, but could not commit to do so beyond that point. Is this a case where it wil take a dividend cut for the shares to take off? Or will the trust be able to soldier through with a maintained dividend until supply and demand finally produces a new sustainable price for the future? I don’t know. But nor am I sure that it matters much. Either way it seems to me that this is a question which is going to be answered over the next few months, so the shares, and indeed commodities in general, remain obvious candidates for any prudent investor’s watchlist, after several years when you could safely choose to forget about them.