Commodities shine as risk assets plunge

Prices of commodities including gold, copper and Brent crude oil are enjoying an uptick as global equity indices are spooked by a sell-off in tech stocks and political unrest in Eastern Europe, according to data from Charles Stanley.

Between 7 and 11 April the price of gold, silver, copper and Brent crude rose 0.8%, 0.3%, 0.05% and 0.31% respectively. In stark comparison, all major global equity indices bar China's Hang Seng suffered losses averaging 3%, with Japan's Nikkei 225 taking the biggest hit, shedding 7.3%.

At close of trading on 11 April the gold price was at $1,312.62 per troy ounce, having pushed higher for the second week in a row and 9.3% up on its 1 January level of $1,201.5. Charles Stanley claimed that this was likely a reaction to the "turbulence of risk assets" and reflected investors shift towards gold as a "safe haven" asset.

The broker added that while 0.8% was a "modest advance" data was starting to suggest that a degree of support had developed around the yellow metal's most recent low of $1,277 and that further near term upside still appeared to be a "realistic expectation".

Charles Stanley said that Brent crude's gain of 0.31% was also "probably a fair reflection of investors' anxieties about the outlook for the global economy", however was less bullish on the commodity adding that it has "tried and failed' to edge above its high of $108.

According to Neil Gregson, manager of the JPMorgan Natural Resources Fund overall sentiment towards commodities is turning positive: "Commodity related equities outperformed global equities (as represented by the MSCI World) in the first quarter, an impressively robust performance given the negative emerging markets news flow. This confirms our view that we have moved beyond the point of maximum pessimism for investor sentiment regarding the resources sector."

FTSE 100 mining companies

The news is no doubt a boon for those investors who were enticed back into commodities through miners who took a battering in 2011 and 2012. FTSE 100 mining companies such as Rio Tinto and BHP Billiton have been attracting investment since last spring as a result of radical corporate restructuring and price to earnings ratios well below the market average.

Following a spate of promising results, brokers and mangers have begun rerating these miners including Rio Tinto, which the Share Centre listed as a 'buy' following production figures released on Tuesday.

"Rio Tinto started the year with a series of production records and while overall production numbers have fallen short of analyst estimates, investors should not be concerned as the company has maintained its production guidance for the full year", says Helal Miah, investment research analyst at The Share Centre.

He adds, "We are confident in the company's outlook and continue to recommend investors 'buy' Rio Tinto based on an improving global economic environment. The stock offers a mixture of capital growth and dividend income for investors willing to accept a medium to higher level of risk."

Elaine Coverley, head of equity research at wealth manager Brewin Dolphin, is also positive on the outlook for miners and recommends investors add to their mining exposure at the expense of other sectors including pharmaceuticals and insurers.

"Although the secular bull cycle is over, commodities and companies could benefit from a cyclical rally, which is not completely impossible. The higher quality miners have improved capital discipline, cut capital expenditure and are now free cash flow positive. Yields for these companies are beginning to look attractive, around 4% for the higher quality major miners, are well covered and likely to grow which will appeal to those looking for income," she said.

Gregson added, "The pick-up in M&A activity in the sector reflects improved confidence in the cycle and attractive valuations. Companies have got the message regarding more disciplined capital allocation and greater shareholder returns as evidenced in the most recent earnings updates."

However, despite positive tailwinds, the mining sector still faces a tough time ahead as demand for precious metals is dampened by factors such as gold import restrictions in India and a drop off in Chinese demand for construction materials such as copper.

Currently, the Association of Investment Companies' commodities and natural resources sector is down 28% over one year.

Additionally, of the ten worst-performing funds listed on Interactive Investor, five are commodities focused and include BlackRock's Gold and General and World Mining funds which over three years have lost 53% and 49% respectively.