Commodity prices have risen from the ashes over the past 12 months leading some experts to predict the coming of a new age for resources, but not all markets have floated higher with the rising tide.
The prospect of a new supercycle has caused a stir among investors. Ben Yearsley, an investment consultant at Fairview Investing, said there are two main reasons why investors are excited.
Firstly, infrastructure spending is a key measure in boosting economic activity after the pandemic, which should increase the demand for resources from governments around the world.
“This has coincided with an unusual period of financial discipline from commodity companies,” he added, which has led to “excellent dividends for investors”.
By returning cash to shareholders, however, these firms have largely ignored spending on new projects, causing a shortage in supply that could take years to rectify.
This phenomenon has boosted the Bloomberg Commodity index, which is up 18.9 per cent in 2021 and has climbed 28.6 per cent over the past 12 months.
Source: FE Analytics
However, while the good times have rolled on for miners, commodity trackers and value markets such as the UK, the oil-heavy Russian market has failed to rally.
The stock market is well-known for its high dependence on the oil price and would be a natural to recover in the current environment, yet despite rising 18 per cent in 2021 so far, it has barely recovered the 15.2 per cent losses from last year.
“Russia is an odd one in that it should be doing well but it's still politics that gets in the way of a higher valuation,” said Yearsley.
Priyesh Parmar, associate director of investment companies research at Numis Securities, noted that investors had been slow to get on board with Russian equities.
While a number of investment companies with cyclical exposure had significantly rerated in recent months, even issuing shares to meet demand, the JPMorgan Russian Securities trust had not had that problem.
Despite rising 18.4 per cent so far in 2021, the trust remains on a 10 per cent discount to its net asset value.
“We believe that JPMorgan Russian Securities is an attractive way to tap into the theme, with 80 per cent of the fund in energy, materials and financials, reflecting the nature of the equity market,” Parmar said.
It is not just this discount that makes the trust attractive, however. As the world’s largest energy exporter, Russia is likely to benefit from the reopening and reflation trade and the economy is expected to return to growth this year, benefiting from rising commodity prices.
It is also the cheapest major global equity market, trading on a historic price-to-earnings ratio of just 9.5x and has an attractive dividend yield of 5 per cent.
Yearsley added that for those that do not want to buy into an investment trust, the Liontrust Russia fund is a good alternative.
The fund has underperformed the MSCI Russia index this year as it has a higher weighting to financials and non-commodity stocks, but still boasts more than half of the portfolio in mining and oil firms and has made investors 15.5 per cent in 2021.
Source: FE Analytics
Although Russia seems like a good bet if a commodity supercycle is established, not all are convinced that there will be one.
Michel Perera, chief investment officer at Canaccord Genuity Wealth Management, said to have a commodities supercycle, you need a “superbuyer” and China – long the driver of commodity prices – no longer has the purchasing willpower that it once had.
“In the past few weeks, it has become very obvious that China is trying to manipulate commodity prices down by selling from its reserves. This has worked for lumber, steel, iron and has also stopped copper rising,” he said.
“Obviously, Russia is a large oil and metal producer and China a large consumer of commodities, but it seems that right now China has the upper hand.”
He added that the “brief and violent recovery” in commodities is not part of a long-term recovery but simply a brief supply and demand imbalance.
“Equities are the area where you can harness the economic recovery, with different sectors benefiting depending on how strong and long the recovery is,” he said.
Kamal Warraich, an investment analyst at Canaccord, said his preferred way to play the recovery would instead be to buy an emerging market fund that has some exposure to Russia, but that is not solely reliant on the market.
This would incorporate a wider net of companies that should do well in a recovery, without the singular play on oil and mining that the Russian market provides.
Most emerging market funds have a weighting below 5 per cent to the country, but the JP Morgan Global Emerging Markets Income trust has maintained around a 10 per cent allocation to the region for a number of years, while an open-ended fund with a similar Russian weighting is the Magna Emerging Markets Dividend fund.
“The Russian market is on a close to a 5 per cent yield, relative to the broader emerging market’s 2 per cent, so it is often a more prominent part of an EM dividend strategy,” he said.