The elevated levels of commodity prices is concerning managers at Schroders who have moved underweight resources stocks.
Speaking to Money Management, Joseph Koh, co- portfolio manager of the Schroders Australian Equity Long/Short fund with Ray David, said the fund had previously been overweight the sector for several years but recently been prompted to reduce this.
This included stocks such as Rio Tinto, Woodside and South32 which had been strong contributors to performance. Since the start of the year to 11 May, Woodside was up 33% while Rio Tinto and South32 were both up around 6%.
“We are underweight resources after being overweight for many years. They have strong cashflow and low price to earnings but commodity prices are very elevated and as the economy slows, commodity prices are going to come down,” Koh said.
“There will be pressure on commodity prices as they are so far above their long-term averages.”
Thermal coal, iron ore, lithium and aluminium, in particular, had all seen sharp increases recently with lithium up 10x in the last two years.
This was a result of factors such as insufficient supply chain and labour shortages combined booming demand as economies recovered from COVID-19 lockdowns plus geopolitical factors such as the Russia-Ukraine war.
Koh acknowledged there were still reasons to like commodities and resources but said he was concerned about the long-term outlook.
“They do generate a lot of cashflow and have low earnings multiples, good dividend yields so we do like them but it gets to a point where commodity prices will come down. Global growth is reducing and that will lower prices. They look cheap but over three to five years, they look high.”
