Oil and gas
On the oil and gas side of things, OPEC’s recent decision to cut production has been seen by many as a watershed moment, indicative of a change in policy on the part of Saudi Arabia in particular, away from pursuing market share at all costs. Some, however, also view it as an indication that the main players are reaching production capacity, a situation that will over the course of 2017 result in an improvement of the supply demand balance and prices.
But, as RBS pointed out in a recent note, while signs of improving fundamentals and sentiment are apparent, “the market remains dogged by reminders that the rebalancing act is lengthy and tumultuous rather than linear. While we remain constructive, prices will likely grind rather than gap higher.”
This point can be applied to the mining space as well; not only is the rebalancing act unlikely to beall smooth sailing, there are also a number of jagged macroeconomic rocks looming just below the surface, which threaten to scupper the recovery.
China
Key among these is China, and the ongoing possibility of a debt-induced hard landing there that remains the major investor deterrent.
Cornelian Asset Management CIO, Hector Kilpatrick, is one such investor. Currently the firm has a light underweight to oil and is very underweight materials, largely on the back of worries about China.
In terms of oil, Kilpatrick said, at some point it is likely that some sort of balance should come back into the market at some stage, as Saudi Arabia eventually capitulates and Russia too looks to cut production. But, on the hard rock mining front, there remains too much uncertainty.
“There has been this huge debt impulse into the Chinese economy that has helped with activity, but they are going to have to continue ratcheting up that debt if they are to keep the level of activity going and that is going to end in tears.”
While Kilpatrick acknowledges that the firm continually re-evaluates is current position, he remains unconvinced of the prospects for miners.
Richard Philbin, CIO at Wellian Investment management, is a great deal more on the fence. Agreeing that the commodity sector is very difficult to call, he told Portfolio Adviser that the firm has been looking very hard at the sector recently and is on the verge of investing in a broad commodities fund.
Because he said: “These companies have had two years of pain, so the next move is likely to be up or sideways while other areas of the market go down.”
