JPM's Gregson: commodities sector poised for recovery

Ambiguous global growth outlooks and mismanagement concerns have caused turmoil among commodity companies but JP Morgan’s Neil Gregson believes the sector is heading for a recovery.

The natural resources manager, who oversees more than €2 billion in assets and runs the JPM Global Natural Resources fund, says the industry has struggled over the past two years as some resources companies have poorly executed many project bids.

But an increase in demand for commodities from China and greater discipline from management in capital expenditure will help lift the prices of both resources and equity in the sector in the first part of this year, Gregson wrote in his latest outlook.

'China remains the key player in commodity markets and while GDP stabilized some time ago, only recently has the pick-up in activity begun to flow through to final commodity demand.'

'This dynamic should support commodity pricing through the first half of 2013,' he said, adding that stocks in the JPM Global Natural Resources fund  had a bias towards copper, iron ore, mineral sands, gold, oil & gas.

However, he believes investors should be cautious towards metals like aluminium, nickel and zinc due to a less stable market outlook.

Closing the margin squeeze

Whilst the gold price saw a steady increase in the first half of last year, equity prices of miners lagged considerably behind. Beside poor dividend payouts, mining companies' management has been criticised after evidence of overbidding for projects that were vulnerable in the face of political risk.

This, according to Gregson, will now turn into a positive for cost pressures in the industries that have, until now, squeezed profit margins.

'We believe expectations have overshot to the downside and that we have moved through trough earnings, particularly for the miners,' he wrote.

'Management teams within the sector are showing a greater focus on capital discipline which will feed through into positive earnings and cash flow surprises in the first half. Moreover, cost pressures across the industry are easing as project cancellations from many of the major diversified companies free up labour and reduce equipment lead times.'

The JPM Global Natural Resources fund invests mostly in mining companies across market cap size. Its allocation remains split between gold and precious metals, energy and base metals.

Top holdings currently include British company Rio Tinto, US firm Freeport-Mcmoran Copper & Gold and Swiss-based Xstrata.

Gregson has returned 7.7% in the last three years across his four managed funds. The average return in the equity natural resource sector over the same period was 9.2%.