Henderson Commodities 2016 Outlook: risks and opportunities
Mathew Kaleel gives his outlook for Henderson on the commodities sector for the coming year.
What lessons have you learned from 2015?
2015 provided a reminder of the consequences of cheap financing and malinvestment in commodity markets. The current oversupply in oil markets is not a problem based on demand (which is still rising), but is due more to the availability of cheap credit that underwrote the development of shale oil. At current oil prices below $40, the US shale oil sector is effectively uneconomic.
Are you more or less positive than you were this time last year, and why?
We are more positive than last year for a number of reasons. Firstly, the majority of global commodity market production is uneconomic at current prices, and there will be a point where the lack of ongoing financing will curtail supply in key markets such as oil and a number of base metal markets. Secondly 2016 is likely to be the second year in which investment in future projects – a key to providing supply in the medium-term – will be substantially down from prior years. This creates the foundation for the next up-cycle in commodity markets, where only the most efficient and financially robust resource producers will survive.
What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?
The key themes to watch going into 2016 are as follows:
The upcoming round of refinancing and asset-based reserve lending for US resource companies, in particular energy stocks, will provide an insight into the level of financial stress in this part of the market and is one of the catalysts in removing marginal and uneconomic oil from the market. We seek to take advantage of changes in this through the management of exposure to the forward curve in oil markets.
The performance of the US dollar. Commodity markets are driven by a number of factors, with one of the major macro factors being the relationship of the US dollar and commodities. The US dollar is a driving factor in many markets, including emerging markets where many companies have their revenues and/or costs denominated in US dollars. The Commodities team uses the US dollar as one screen for commodity markets.
The following chart shows the long-term relationship between the US dollar and commodities. Note that the US dollar is shown as an inverse for the purposes of comparison.
Source: Bloomberg, Henderson Global Investors, as at 31 December 2015. BCOM refers to the Bloomberg Commodity Index, in US dollar terms.
The twin effects of a strengthening US dollar are higher commodity revenues for exporters and reduced commodity demand, due to the lower purchasing power of the other currency. We believe that 2016 could be an inflection point for the US dollar, in particular against other funding currencies such as the euro and yen, especially as central banks needing liquidity (for example China and Saudi Arabia) will potentially sell US dollars to finance budgets and projects at home.
Finally, commodity markets are always subject to unpredictable events, be they weather-related impacting upon grain markets, or geopolitical events impacting energy markets. While these can be temporary events, they provide potential for upside and positive performance for our clients.