No buying opportunity in commodities
Investors who are looking towards the recent slump in commodity prices – which has seen many resource stocks plunge on the Johannesburg Stock Exchange (JSE) - as a good buying opportunity, are likely to be severely disappointed.
According to Rob Spanjaard, investment director at Rezco Asset Management, the record high margins that have been enjoyed by commodity producers over the past decade are likely to start falling, which will continue to make the cheap valuations of many mining shares a mirage. “We believe commodities will struggle the most among the local asset classes, as global growth also continues to slow,” he says.
He says the FTSE/JSE Africa Mining Index is already down 9% year to date, exacerbated by slowing growth in commodity-hungry emerging economies such as China and Brazil. “We are still bullish about China and it will still grow but now supply is taking over demand, which will start to suppress prices. The mega boom that we have had in commodities will start coming to an end. The super profits that a lot of the mining houses have made will come down to more historical levels.”
Spanjaard says that while mining stocks as a whole are underperforming, this does not mean that all commodity prices are set to contract. “Each commodity has its own supply and demand fundamentals, so oil would be different to iron ore. It is the large industrial commodities that investors should be most concerned about such as iron ore, aluminium, copper and zinc.”
“There has been a lot of speculative demand for gold but we are relatively negative about yellow metal. It has already had a fantastic bull run, from $280 to highs of around $1980. Many investors bought gold for the pure reason that they believed it would continue to go up. We are quite negative on gold for that reason, as we believe it has reached its peak.”
Even though commodities are set to come down, Spanjaard warns against viewing this as a buying opportunity. “Some investors look at commodities and believe that the price is really cheap. However, there is something in investments called the value trap, where an asset looks cheap but just keeps getting cheaper because the earnings keep falling.”
