AT 25 BASINGHALL STREET, AROUND

the corner from Investec’s Gresham Street headquarters in London’s Square Mile, portfolio managers at Investec Asset Management are less downbeat than their banking peers They are, however, taking a cautious and selective approach.

Commodities prices are back where they were when the up cycle began in 2002, according to the Bloomberg commodities total return index, which measures physical commodities prices.

“That in itself merits some consideration and some reflection, when you think of how the world has changed in those 13 years,” says Tom Nelson, head of commodities & resources. “Growth in China may have slowed but the Chinese economy is immeasurably bigger today than it was then.”

Since March 2009, when markets started to recover from the global financial crisis, physical commodities have underperformed, slipping 16%, compared with a 142% rise in global equities. That’s reflected in Investec Asset Management’s resource portfolios. As of June 30, total assets under management in its commodities and resources funds sat at $2,2bn, after peaking at around $8bn in 2010-11. The weak commodities markets and their effect on company share prices are also reflected in the performance statistics, with the Investec Global Natural Resources Fund returning a negative 22,4% in the first eight months of the year.

Still, Nelson and George Chevely, who co-manage the fund, are seeing signs of life — perhaps more so in the oil market, but increasingly in base metals too, as supply/demand dynamics shift. Though sentiment remains bearish, with too much oil sitting in storage, supply is moving lower and demand is rising.

With lots of production coming offline, particularly in the US shale market, spare capacity is almost entirely held by Saudi Arabia. It means any interruption of supply could push prices sharply higher. “Our assessment of the market looking into 2016 is that we are going to require an oil price which gives the US shale rigs an incentive to come back to work,” he says.

While turning off the oil taps can quite quickly be felt in the supply dynamics in the oil market, it takes longer to be felt in the mining industry, where companies have been cutting back on expansion and trimming production for the past three years. Sentiment in this market remains “terrible”, Chevely says.

Copper is an example of another commodity that Investec Asset Management expects to recover, with bonded warehouse stocks in China falling from 700 000 t in June to about 400 000 t. “It's not the same for all metals, but we have seen signs of more activity in China in the last two months than we have seen for a while,” he says. “Is it going to continue? We don't know. Is this a great recovery? We don't think so.”

Iron ore, on the other hand, could have further to fall.

It’s cash flow and balance sheets that the Global Natural Resources team is focused on as it looks for investments in the sector. It’s also steering clear of small caps and highly leveraged companies.

While the fund remains more weighted towards energy stocks, the two top holdings are BHP and Rio. Chevely says it’s been increasing its exposure to base metals, at the expense of energy.