Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
We have vaccine developments to thank for the rapid displacement of a dismal October for stock markets from our short term memories. November turned out to be a stellar month, fuelled largely by growing hopes of a return to normal life. News the first doses of the Pfizer vaccine will be rolled out in the UK this week is an unusually good cause for celebration.
Following such an extraordinary month, you might expect December to have the potential to bring markets back down to earth. After all, the UK and large parts of the rest of the world remain in near-lockdown conditions; the high street is wilting under the weight of a deadly cocktail of high fixed costs and rarefied sales; and the days left to securing a Brexit trade deal are rapidly running out.
Commodity markets though seem to be urging us to look a bit further ahead and with a more optimistic bent. Oil was back close to US$50 per barrel this week, after OPEC and Russia decided on Thursday to increase their combined production by a smaller than anticipated amount from January. That’s quite a way from the US$38 oil was trading at a month ago and a world away from the negative oil prices of April, when demand conditions in Texas went seriously out of kilter1.
Reminiscent of conditions during the commodities super cycle of the 2010s, iron ore prices have also leapt ahead. Prices rose to their highest since 2013 this week, as heavy Chinese buying met with news of a production downgrade by Vale, the world’s largest producer of the iron ore and pellets used in making steel2.
Copper, widely seen as a barometer of global economic trends due to its wide use across a large number of industries, has also been rising rapidly. China imported over 50% more unwrought copper and copper products in October than during the same month in 2019 and, like iron ore, copper prices climbed to a seven-year high this week3.
These themes sit both well and uneasily with what there have been further hints of so far this crisis –big shifts underway, from west to east and from fossil fuels to green energy and electric vehicles.
On the first point, it would appear China’s adept handling of the coronavirus threat may only have accelerated the transfer of economic power and influence eastwards. Mainly as a precautionary measure against inward infection from other countries, more than one million Chinese people have reportedly received a vaccine against Covid-19 since Sinopharm began rolling out its experimental formulation in July4. New cases of the virus have been rare in China since early March.
Survey data out this week showed China’s economy recovering to pre-pandemic levels, with factory output rising at its fastest rate in ten years5. There is little reason to expect any other country being the main source of excess demand for commodities in 2021, as China returns to old methods of building its way out of a downturn.
It will, however, probably not be alone. With short and long term interest rates at or near record lows and central banks already buying vast quantities of government bonds to help them stay there, the onus has largely moved to governments to sustain economic growth.
Governments around the globe have already made plain their intentions to drive a recovery from the pandemic through spending on aging or missing infrastructure, which will create additional demand for industrial commodities like iron ore and copper.
Next to China, the US is likely to remain key. On the campaign trail, President-elect Biden pledged to spend US$2 trillion on clean energy – a positive for copper as well as precious metals such as palladium and rhodium – and on America’s creaking infrastructure, specifically on roads, bridges, water systems and broadband networks6.
While the US Senate remains finely balanced and could curtail Biden’s plans if it stays Republican after run-off elections in Georgia next month, it seems likely the general impetus to spend more on infrastructure will emerge intact.
The implications of rising commodity prices are far reaching. They promise to improve the relative fortunes of commodity producing countries – in particular, emerging markets like Brazil, Russia, South Africa and Indonesia – after a period of losing out to consumption driven economies, notably the US.
Closer to home, large, low cost metals producers like BHP and Rio Tinto also stand to enjoy a strong revival in fortunes, alongside the oil majors BP and Shell. It’s a while since we’ve been able to say that.
Fidelity’s Select 50 list of favourite funds provides plenty of scope to participate in strengthening economic conditions. The Fidelity Special Situations Fund, which focuses on businesses undergoing positive change yet to be recognised by the wider market, offers one such route. The public services provider Serco, construction company John Laing, and fuels retailer DCC are among its largest investments currently.
The multinational, low cost, iron ore and copper miner Rio Tinto is currently among the largest holdings of both the Fidelity UK Select Fund and the Franklin UK Equity Income Fund. Liontrust UK Growth is one of several funds holding either BP or Shell or both among its top ten.
Another Select 50 choice, the FP Foresight UK Infrastructure Income Fund, offers an exposure to investment companies dedicated to renewable energy and infrastructure projects and targets an attractive annual income from its investments of 5%. It also has the potential to work as a partial hedge against inflation, in the context of a broader portfolio of investments in equities and bonds.
¹ Bloomberg, 04.12.20
² Mining.com, 02.12.20, and FT, 03.12.20
³ Mining.com, 01.12.20, and General Administration of Customs, PRC, 23.11.20
⁴ South China Morning Post, 19.11.20
⁵ IHS Markit, 01.12.20
⁶ joebiden.com, December 2020
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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