Have commodities had a capitulation moment? Several banks (Barclays, Deutsche Bank, JP Morgan) have ceased making markets in them, multiple funds have shut down, and some investors have also thrown in the towel. Yet some of the most seasoned commodity market traders have a more constructive outlook: “You do not need another boom and bust period like the one we saw from 2001 to 2011 to find compelling investment opportunities,” says Ballymena’s lead Portfolio Manager Oliver Kinsey.
Ballymena is an actively managed agricultural commodity hedge fund, which trades opportunistically on the long or short side. At the present time, however, Kinsey views commodities – even from a long-only angle – as relatively attractive. Kinsey reckons “the chances of heightened volatility in traditional asset classes (equity and fixed income) is certainly rising and we may even see an equity market correction. There are only two instances in history of a longer bull run for the S&P 500 without a 20% correction. One ended in 1929 and the other when the tech bubble burst in 2000. We are not necessarily predicting an implosion of traditional asset classes but feel they inevitably see much greater two-sided volatility in the future, a scenario where macro and commodity specialists could do relatively well.”
It may have gone somewhat unnoticed but commodity long-only indices were up in 2016 and the tide could certainly be turning for this space.
Kinsey sees scope for CTAs and long/short discretionary commodity trading funds to generate “crisis alpha”. But commodities can also thrive in more benign financial markets and could perform well even if equities continue melting up. “Equities are on a sugar rush after Trump, but if the reflation story is true, then that is very good for commodities in general,” Kinsey argues.