Investing lights from Point72 to Pimco are calling for raw material prices to rise. Wall Street pioneer Goldman Sachs Group Inc. predicts a new commodity bull market that can keep up with the China-driven boom of the 2000s and the oil price spikes of the 1970s.
“We firmly believe the foundations are in place for a new structural bull market to begin,” said Robert Howell, senior research strategist at Gresham Investment Management LLC, Nuveen’s commodities-focused unit, with $ 5.8 billion -Dollar the Sector: “In the years to come, it is very likely that a great many investors will look back to 2020 and wonder how they overlooked these signs of a new bull market in commodities.”
Prices jumped from their lowest point in the spring. Copper, iron ore, and soybeans have all reached their highest levels in more than six years, sparked by a Chinese spending spree.
Now Chinese importers are being supported by global macro investors interested in commodities to bet on the global economic recovery and hedge against the prospect of high inflation.
Commodities are stereotypical cyclical assets that rise and fall in sync with the global economy. This puts them in the first place to benefit from the recovery that virus vaccines could trigger.
“We are broadly optimistic about commodities as the recovery in global economic growth and the possibility of higher inflation should support prices,” said Evy Hambro, who is BlackRock Inc.’s $ 16 billion global head of theme and sector investments managed.
Nic Johnson, who manages approximately $ 20 billion in commodity index investments and a separate hedge fund at Pimco, believes commodities “will benefit from the global reflation issue.”
The enthusiasm marks a turnaround for an asset class that has been unpopular for years. While investors looked at commodities as prices rose in the decade to 2011, they have weighed on the sector since then. Many of the best-known commodity-specialist hedge funds left the markets – including Astenbeck Capital Management, Blenheim Capital Management and Clive Capital, each of which managed billions of dollars at their peak.
But now this trend is starting to reverse. The entire hedge fund industry has seen outflows this year, but commodity-focused hedge funds have managed to raise money. According to data from eVestment, they had more than $ 4 billion in drains as of October this year, compared to around $ 55 billion in industry drains.
Fund managers also see growing interest. Don Casturo, who founded Quantix Commodities as a sector-focused boutique in 2018 after serving as chief operating officer for commodities at Goldman Sachs, said he first called asset managers he already knew would be interested in the asset class.
“Now we respond to incoming calls – people who have decided raw materials are interesting find us,” he says. “The environment that created such a bullish tailwind for stocks and fixed income is coming to an end.” People are looking for alternatives. “
Quantix’s long-short commodities fund, which started at $ 50 million in 2019, now manages $ 620 million and has so far achieved a return of just over 15% this year. The company introduces a long-only inflation index in February.
Others have had strong performance as well: Oil trader’s Pierre Andurand’s Discretionary Enhanced Fund rose 152.2% in the year ended December 11, according to a person familiar with the matter.
Of course, not everyone is clearly bullish.
For one thing, prices have already recovered well. Pimco’s Johnson says he’s “most positive” about US natural gas but doesn’t expect farm prices to rise unless there is a significant drop in crops in the southern hemisphere.
JPMorgan Chase & Co. analysts warned last week that the Chinese credit cycle was already at its peak and forecast lower base metal prices during 2021. While some fear rising inflation, others see little cause for concern argue that this is global economic activity will remain under capacity for years.
However, the commodity cops have other arguments in their armory. Quantix’s Casturo argues the rotation back to commodities is still in its infancy, suggesting around $ 130 billion of passive investor money that has left the sector in recent years.
Many expect stimulus packages to electrify transport and grow renewable energies to fuel demand for metals.
Across the extractive industries, supply can be constrained after years of low prices forced producers to contain spending. Nowhere is this truer than in the oil industry, where the combination of falling prices to below zero in April and investor pressure has led top companies to cut spending.
“Oil and oil stocks are still the only reflationary wealth that has declined sharply year over year,” said Jean-Louis Le Mee and Will Smith, who run the Westbeck Energy Opportunity Fund, which rose 63.6% through November In a recent letter to investors, they argued that capital discipline and focus on free cash flow generation would “soon resonate with investors as the next oil bull cycle charges”.
The “stars align with higher oil prices”.