Commodities: Best Investment of 2016

Natural resources related equities - including gold and energy stocks - have outperformed the broader equity and fixed income markets so far this year

Emma Wall 11 November, 2016 | 2:00PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Fund Analyst for Morningstar, Fatima Khizou, to talk about commodities.

Hi, Fatima

Fatima Khizou: Hi, Emma.

Wall: So, after five very long and hard years for commodities we've had a bit of a rebound in 2016, haven't we?

Khizou: Yes, certainly, Emma, it's been an interesting year for the commodities sector and we've seen since January which marked low bottom for so many commodities, we've seen the sector bounce off strongly from those levels and actually, the natural resources related equities have outperformed the broader equity and fixed income markets so far this year. So, it's been an interesting year so far.

Wall: And then drilling down into those commodities, we've got to talk about gold. It's an investor favorite. How has gold done in 2016?

Khizou: Gold actually has been the star performer this year and there are many reasons that explain such stronger returns. Predominantly, the uncertainty around the global economy this year, but also political events and also the diminishing probability of interest rate hikes in the U.S.

As you remember, at the start of the year, the markets priced in four interest rate hikes in the U.S. and as we got on over the months, that probability has diminished and we saw a flight into that safe heaven assets for many investors and the demand has increased substantially this year.

And other factor that actually explains that return of trust from investors is that we've seen many companies in the sector seen their financial states improve significantly from periods in '12-'13 and that has also helped drive gold higher.

Wall: I'm looking then at a couple of days where gold spiked. We saw gold spike after Brexit and recently, this week, we saw the price of gold spike after the election of Donald Trump for the next U.S. President. What then looking at another commodity, at energy, because this has been quite a volatile year for the oil price, but it has moved up, hasn't it?

Khizou: Yeah, energy is another sector that has been continued to make headlines this year and we've seen that downward trend that started in June '14 and we've seen the prices bottom up to below '13 January. However, we've seen a return or reverse of that trend over the past few months and actually the sector is up this year and there's a lot factors that have helped on the supply side but also on the demand side. The freeze in February announced by the OPEC has helped.

And more recently, the announcement by OPEC again to cut production has further helped this sector and the prices in that upward trajectory. The demand is also strong and we've seen the production fall in U.S. as well and all those developments have helped the prices in that sector.

Wall: So, if investors are still feeling bullish about the commodities sector, which funds do we rate highly that can offer them exposure to this space?

Khizou: We have quite a good selection in that area. So, if investor wants really exposure to gold equities, we have the BlackRock Gold and General, which is run by an experienced manager in that field. Within energy, we have Guinness Global Energy, which is also managed by a highly experienced team. And if investors wish to access the over complex, there is First State Global Resources, which we highly rate as well or JP Morgan Global Resources, which is more a smaller-cap fund. So, there's quite a good selection.

Wall: Fatima, thank you very much.

Khizou: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BlackRock Gold and General A Acc1,229.89 GBP-2.87Rating
Guinness Global Energy C GBP Acc10.93 GBP-1.33Rating
JPM Natural Resources A Net Acc9.31 GBP-1.55Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar