Rita González, CIO at Lisbon-based Baluarte SCI, looks to commodities generally as part of the search for diversification, which remains the main foundation of the strategies pursued by the firm.
“Because of its positive effect on overall risk but also because it allows exposure to different types of risk and value.
“When appropriate, we will consider commodity-related financial instruments, along with shares, bonds and other alternative investments, in the design of investment strategies for or clients. The associated investment strategies will be subject to careful study and selection.”
Although she looks at both gold and oil, she admits to focus on oil as it is the heaviest of all components in most commodity indices.
“The favourable evolution of this assets arises from specific individual factors, related to supply and demand, and also from common factors – including economic growth, expectations on inflation rise and geopolitical tensions. If these factors were to persist, this trend should also persist.”
On the question of changes on interest rates having an impact on commodities, González says: “Anxiety over anticipating unavoidable changes in monetary policy promotes volatility. Investors are nervous about future restrictive policies from central banks. Potential inflationary pressures exacerbate these risks. In this scenario, commodities present themselves as an inescapable class, reinforcing the importance of investing in real assets.
“In spite of the fact that higher interest rates tend, as a rule, to reduce the demand for these assets, the timid tightening of the FED at this stage of the cycle has allowed their appreciation.
“An increase in interest rates beyond expectations would prove to be a headwind. In this scenario, commodities could suffer a severe setback.”
Currently, although commodities are buoyed by what the fund selector describes as great enthusiasm in this market, there are still reasons to remain cautious.
“The long-term prospects for oil prices depends heavily on the balance between US oil production and the persistence and depth of OPEC’s production cuts. Higher prices will benefit the US shale industry, and alternative sources, which could result in faster production growth of energy. As an example, in 2014, when North American production accelerated above expectations, there was clear surplus capacity, and the price suffered a sharp setback.
“From a technical point of view, the fact that the curve is still in backwardation gives investors a positive roll yield. This should give additional support to the market. Over time, stability should be found in the $ 60- $ 70 range.
As for gold, its price has been supported by expectations of rising inflation, the sharpening of geopolitical tensions and the fragility of the US dollar.”
González continues explaining that they are not very positive for gold, given the specific imbalances in this market, on which the company foresees excess supply over time. For all these reasons, she says that increasing current positions would not be prudent.
The Portuguese fund selector concludes that actively managed funds are, in her views, the best way to play these assets.