20th October 2015
Colin McLean, managing director of SVM Asset Management looks at how metal and mining stocks can impact investors’ portfolios…
With the recent collapse in the shares of many mining companies, investors have seen how much commodities matter for their portfolios. Far from offering protection against weak stock markets, metals and mining businesses now appear to be central to many market issues. So how should investors view this sector?
The appeal of commodities lies in their enduring permanent nature with steadily rising demand over time. More recently, burgeoning emerging market economies also promised ever greater demand. Commodities were promoted for their stability and widely deemed as an asset class that deserved a place in portfolios. The question that persists now for investors, is how best to navigate the sector.
Metals and mining companies are disproportionately represented in the London stock market which feeds into the associated indices and index funds, such as ETFs. Given how closely many conventional actively-managed funds follow indices, the impact on portfolios has been significant. It is more essential than ever for investors to develop a real world understanding of risk rather than simply relying on the indices.
Added to the challenge of mining and energy has been weakness in many “soft commodities” such as coffee, and sugar where prices have plummeted. All this contributes to a picture of deflation globally, rather than inflation which central bankers seem to fear.
It is clear that not even the mining giants or their bankers are good forecasters of commodity prices and so investors should be dissuaded from such predictions. Instead they should consider how their portfolios are positioned in a deflationary world and then determine whether commodities balance risk or increase it.