Commodities “poised for a bull run” after years of underinvestment, says RWC Partners

RWC Partners' Clark Fenton believes the broad commodities complex is poised for a bull run after much of the global mining and energy sectors were “starved” of capital for a prolonged period.

Capital expenditure from commodity producers has been in the doldrums for much of the last 12 months amid the coronavirus pandemic, with tumbling prices keeping a lid on investment in new and existing projects.

 
While demand slumped amid the global lockdown, supply of many commodities has also been constrained thanks to the pandemic and other environmental factors.
 
Now, as demand rapidly bounces back, Fenton, manager of the RWC Diversified Return strategy, says signs of a supply crunch are starting to send commodity prices surging.
 
“We are facing a bull run in commodities now,” says Fenton. “We have demand coming not only from China, but also from numerous regions trying to stimulate their economies post the pandemic by investing in infrastructure. Many industries are also coming back on stream post the pandemic, putting more pressure on prices.
 
“As demand takes off, on the supply side we’ve seen many parts of the commodities complex starved of capital for some time, meaning there has been a lot less capex. Higher prices are the inevitable outcome.”
 
Iron ore prices hit a 7-year high last week following rampant demand from a resurgent China and lower than expected production forecasts from Vale, one of the biggest suppliers of the resource globally.
 
Fenton said while iron ore has already jumped in value, the stars were aligning for a bull run across the commodity spectrum because of these conflicting forces, leading him to take the Diversified Return fund’s weighting to commodities to its highest level since launching the fund over a year ago.
 
“With spending on the green economy and infrastructure having widespread political support, we think commodity demand is going to be a long-term theme,” he says. “We’ve therefore been increasing our exposure, particularly to areas like copper and nickel, and commodities involved in the energy transition theme, as the world tries to go greener.
 
“As a diversified fund we can effectively allocate anywhere, but we now have the highest exposure since launch to commodities.”
 
Fenton added ESG concerns globally are likely to push commodity prices up even more in the near term.
 
“When you layer in ESG and the need to extract resources in a more environmentally and socially-friendly way on top of that, that will push up prices of extraction in the long-run, and therefore the overall price,” he said.
 
The risk to the outlook for commodities would be a repeat of the lockdowns we have seen on a global scale once again, while Fenton conceded prices of some specific commodities have already moved up significantly.
 
Nonetheless, he believes across the wide scope of metals, energy and agriculture, there are supply/demand dynamics which support higher prices, particularly as the will is now there politically to “build back better” across much of the world.
 
“The green revolution we are seeing is a reminder that catastrophic events can generate sufficient political and social will for change, and given what we now know about climate change, perhaps now is the moment for words to become deeds,” he says.
 
“For investors, it means their asset allocation process needs to change and adapt to be congruent with the goals of the green revolution, and the will among countries to build back better.”