Commodity prices, as well as share prices have been hit.
But Neil Gregson, fund manager of JP Morgan Natural Resources fund said that Britain's exit from the EU won’t necessarily have a significant impact on commodity prices in the longer term. But he does say that in the short term this could be an interesting buying opportunity for investors.
“We will be looking for dislocations in terms of share prices in the days following the vote. But we really expect little impact in terms of the broader commodity space,” he added.
Lower gold weightings
One possible beneficiary of a Brexit is gold.
“Valuation of the gold sector has become stretched, given that the price has moved so fast this year,” said James Sutton, a client portfolio manager on the same fund, “However we still retain exposure to gold as we think we are going to be in a low interest rate environment for a long period of time, and that will be a support environment for gold.”
Any rally in gold price should have a positive effect on companies that mine and produce gold.
“As the gold price goes up, their earnings go up at a higher rate. So they have good leverage to gold and you should get a better performance through the gold equities in a positive market,” said Joe Foster, manager of the Lombard Odier World Gold Expertise fund.
Share prices of gold equities therefore echoes companies’ growth in earnings. When gold prices were up 15% from January to May in 2016, there was a corresponding 72% growth in share prices of gold equities, according to data provided by Sutton.
However, Rob Marshall-Lee, head of emerging markets at Newton Investment reminded investors that companies that produce gold are good as short-term trading stocks but are not necessarily “buy and hold” stocks.
China will benefit commodities
Sluggish manufacturing data from China - as well as the renewed weakness of the renminbi – has unnerved commodity investors, fuelling concerns over the country’s demand for raw materials. However Sutton believes that commodities can be benefit from a shift of consumption in China.
“This sector is not just about steel and coal. There is another angle to it, such as gold, diamonds and cooper. The can from another leg of growth driven by consumers in China,” he says.
Sutton says that the growth in the production of electrical vehicles is a good example of how this consumer-driven trend stimulating demand for cooper- as the use of cooper is 20 times greater in electrical cars when compared to conventional vehicles.
Commodity sector looking more positive
Sutton says the commodity sector is “getting fairly positive”, buoyed by rising oil prices and a slightly weaker US dollar.
“As oil prices have started to move higher, this has improved sentiment across the sector,” Sutton said.
“We are seeing upgrades in terms of earnings and profits from companies,” he said, reminding investors that there would be some volatility along the line but “we’ve had very significant rallies on the road”.
This post was written by Karen Kwok of Morningstar.co.uk
