Nicolas Robin of Threadneedle Investments discusses his outlook – including expectations and risks – for commodities broadly in 2012, and specifically in individual sectors and markets.
Date: Apr 2012
He is slightly more cautious on base metals and precious metals, given that a potentially stronger economic environment in the US might have a negative impact on these sectors.
Key themes and drivers for 2012
Within the energy sector, Robin said the one sector he likes is refined products, which means gasoline in the US, and gas and oil in the European markets.
The positive outlook is due to a reduction in disidation capacity in the US over the last few years as well as the likelihood of further geo-political tension.
From a strategic standpoint, he said these sectors therefore seem to be the best to focus on for asset allocation.
Robin said he is very positive for oil prices and demand going forward – with growth especially in emerging markets. This is more than matching the slowdown in demand in the developed world, he added.
Also, he said he sees spare capacity shrinking very fast, so in 2012 and 2013 this should lead to a strengthening in the sector.
For investors to access some of these opportunities, they could use structured products to give them an exposure to the oil market – although they face volatility which is higher than the benchmarks, explained Robin.
Risks for investors to be aware of
When looking at risks, Robin said investors need to consider a spike in oil prices, to the same extent as happened in 2008 where the rally in prices actually has a dampening effect on the rest of the economy, and therefore leads to weakness in the other commodities sectors.
Another risk, he added, relates to any strengthening of the US dollar, which would have an impact on commodities pricing. There has previously been correlation between dollar weakness and commodity prices, with investors playing commodities as a way to protect themselves against depreciation.
A change in regime in the US, therefore, would probably lead to some weakness in commodities, said Robin. Yet that would probably only affect those commodities which are more correlated to FX – which means base metals and precious metals.
For Robin, a worst-case scenario would be further tension in Europe and also a scenario where risk aversion leads to a dollar-bid – which is quite similar to what happened at the end of 2008.
Influence of emerging markets
According to Robin, China has been very important for several key commodities, one being copper, where China has presented the biggest driver of demand over the last few years.
In addition, with some new strategic reserves ready, the expectation is that these will be filled with 80 million barrels of oil to be purchased – which would be a significant driver of oil coming from the region.