Fri, 06/07/2007 - 06:52
The commodities market is as strong as it has been for 20 years and will continue its cycle for far longer than expected, according to John Payne, manager of the Resolution Hexam Global Resources Absolute Return Fund.
Payne believes the environment for commodities is 'incredibly strong' and is likely to remain so for at least 10 years, albeit with bouts of volatility. He says the industrialisation of China and India, whose populations will increasingly have money to spend, will be the key driver of the extended boom, with infrastructure expenditure remaining vast as the countries develop.
With inventories low for base metals, bulk commodities and other areas of the asset class, Payne believes consistent demand growth over the long term against periods of constrained supply will enable resource companies to continue to generate huge cash flow. Furthermore, M&A activity is likely to persist as investors realise that the cash flow generated by the asset class has duration and that the return on investment ranks well relative to other investments.
He compares the demand for commodities to the post-World War II landscape, when rebuilding work, infrastructure reconstruction and industrialisation triggered huge demand for several decades.
However, Payne believes that other areas, particularly environmental technology, will go hand in hand with the industrialisation of developing economies, arguing that increased politicisation of climate change will lead to substantial investment in the environmental technology area, creating compelling opportunities.
'Not for 20 years has the environment for commodities been so strong,' he says. 'The combination of industrialisation, infrastructure spend and the consumer factor is extremely powerful, and I believe the cycle will last much longer than people think - at least 10 years, although there will be periods of volatility.
'Inventories are historically low for base metals and demand will remain very strong, as is the case for other areas of the asset class. As a result, commodities firms are generating huge cash flow and there is a lot of M&A activity out there.'
Resolution Asset Management is a GBP59bn UK investment provider that has its own fund management capabilities alongside three joint venture boutique operations. Hexam Capital, focuses on emerging market equities, while the other Resolution boutiques are Argonaut, a specialist in European equities and Cartesian, a UK equities manager.
Payne joined Hexam from Barings, where he was a global emerging investment specialist and lead manager on the Baring Global Resources Fund, having joined the firm's emerging markets equity team in 2000. Previously he had spent thirteen years investing in the Asian and Australasian equity markets, six of those in the Barings Hong Kong office, and was responsible for the Baring Australian Growth Fund as well as managing institutional regional mandates including a derivative fund. Earlier Payne was a divisional director with Invesco-MIM in London.
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