Despite a recent significant drop in commodity prices that may be the beginning of a longer slump, Fidelity Investment Management has argued the structural case for commodities remains strong.
The recent drop was the result of growing concern about the strength of global demand, on the back of rising interest rates in emerging markets which triggered a monetary tightening cycle that would hold back developing economies, according to Fidelity investment director Tom Stevenson.
“It was a change in global monetary policy that initially shifted sentiment and prompted investors to reassess their riskier positions in growth assets such as commodities and shares,” he said.
A falling US dollar makes commodity prices more expensive to markets outside America, which can also trigger lower prices, he said.
“Strong emerging market growth and loose US monetary policy have been central to the global recovery since 2009 and the feeling among investors is that the tide is turning on both,” he said.
Despite these recent gyrations, the structural case for commodities remains strong, Stevenson said.
China’s share of world energy consumption is expected to rise from 10 per cent a decade ago to 25 per cent in 10 years time, he said.
“We are in the middle of a fundamental shift in the balance between the supply of and demand for commodities which overshadows the more cyclical factors at play,” he concluded.