JP Morgan Asset Management’s Gregson comments on outlook for commodities

Neil Gregson, lead manager of the JPM Global Natural Resources and JPM Natural Resources funds has outlined three reasons why long term investors should retain faith in commodities.

While it is impossible to know when the current sentiment to commodity sector fundamentals will reverse, the long term structural case for an investment in commodities remains compelling.

Investors should look beyond current short term concerns, such as the European debt crisis, and focus on the medium term outlook for investments – especially as we are seeing impressive individual stock performances in the oil and gas sector. The next ten years will see more of the same – emerging markets led commodity demand growth as well as ongoing supply issues in the sector – but we believe the natural resources sector continues to offer one of the most exciting investment cases available.

1. Opportunities in ‘new frontiers’ have energised the oil and gas sector

Whilst rich oil basins have been known to exist in ‘new frontiers’ for some time, it is only now that they are being unlocked, and it is not the short term oil price rise, but rather a realisation that the medium term assumptions for the oil price have changed, that has energised the oil and gas sector. In 2012 alone, we have reaped the substantial benefits of investments in these ‘new frontiers’ which have outperformed both a return from the majors and the rise in the oil price1:
• Africa Petroleum – Liberia offshore: +252%
• Ophir Energy – East Africa Gas: + 95%
• Oil price: + 9%

2. Supply side issues offer rationale for investment

At JPMAM, we believe investors are gauging the health of the copper sector, for example, on demand drivers alone, and as such concerns about global growth, and in particular the (government-induced) Chinese slowdown, has resulted in a volatile performance for this economically-sensitive metal. However, a recent gathering of miners at the CESCO conference in Santiago, reinforced our view that major producers face supply side challenges which will impact 2012 supply. These supply side issues can’t be ignored and support the compelling case for an investment in the sector. Taking copper as an example, a combination of declining ore grades, a shortage of skilled labour, environmental approval delays, longer lead times on obtaining equipment as well as a number of technical operating challenges can all create supply-side issues yet demand remains consistent.

3. Valuations offer an attractive entry point…fundamentals won’t be ignored forever

The mining sector has been de-rated so severely, we believe it is hard to argue a better entry point into the sector. Valuations are at rarely seen lows as the sector suffers from a divergence between fundamentals and fear. For the investors who recognise the long term structural case for an investment in commodities, this offers a market entry point.


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