.jpg)
BlackRock’s Catherine Raw, fund manager in the natural resources team, believes that commodities are set to make further progress as investors become more confident that the majority of the world economic crisis has passed. While mining equities having rallied in 2009 (up 61% in US dollar terms) valuations are still attractive, being around half what they were in May 2008.
Catherine Raw said: “We expect China to continue to have a significant influence over demand for commodities, given the commodity–intensive stimulus package from the Chinese government and their future growth plans. The nature of China’s command economy has meant that this stimulus has filtered down into the real economy, unlike in the US - so far. In China, government-driven lending has spurred activity. Economic data coming out of China this year has suggested that, despite the global recession, the economy has started to recover and high levels of economic growth may continue in the region, a bullish signal for the mining sector. GDP and industrial production growth rates appear to have bottomed; car sales and retail sales are showing signs of improvement and there has been a strong pick up in fixed asset investment. Steel production has recovered significantly and on an annualized basis is now ahead of 2008”.
“We are now starting to see some signs of restocking in the US and Europe. Should these trends gather momentum for the rest of the year it looks as though we might start to see normalized demand levels for commodities in 2010.”
However any moderation in China’s rate of recovery will affect equity markets. We have therefore increased exposure to major diversified mining companies and bulk commodity producers which are likely to be less affected by negative market sentiment. We are overweight in bulk commodities, copper, and platinum; where supply-side constraints coupled with a demand recovery could likely lead to market tightness and elevated prices.
The Chinese government clearly believes in the longer term growth story as it has been taking advantage of low commodity prices and low equity valuations by buying up strategic stockpiles of some base metals, lending to countries such as Russia and Brazil to secure future commodity supplies and taking equity stakes in foreign mining companies.
