EDITOR'S LETTERMerryn Somerset Webb
The bottom of the barrel
When investors look back to 2015 you might think they’d remember it for one thing and one thing alone: the collapse in commodity prices. Over the last year, pretty much all prices (bar those of some agricultural commodities) have fallen sharply – with oil leading the way. It’s just hit a six-year low.
We discussed what’s happened in these markets in our cover story on gold miners last week, but it’s pretty straightforward. When Chinese demand really kicked off at the start of the century, prices soared. Huge amounts of capital poured into increasing commodity production (ie, lots of firms dug lots of new holes in the ground and dug stuff out). Then just as supply was growing fast, crisis hit, China slowed and super-boom turned to super-bust.
That’s hit resources stocks – now dragging down indices worldwide. It’s hit the currencies of all the countries dependent on commodity exports. It’s given the corporate bond market a bit of a turn: according to Ed Yardeni of Yardeni Research, just under 20% of high-yield corporate bonds are attached to energy firms. And it’s starting to affect dividend payouts in the UK: Anglo American is to get rid of some 60% of its staff, over half its assets and (for now at least) its dividend. That’s nasty – and given that payouts from resource firms make up a hefty percentage of the overall UK market yield, it’s pretty worrying for income investors too.
Normally we might look at a misery list like this and wonder if it is time to start buying every commodity stock in sight. When a firm like Anglo capitulates so dramatically, it makes sense to think – as Jonathan Allum puts it in his Blah! newsletter – that we might be “within spitting distance of a market bottom”. The problem is that market bottoms can last a long time (I’ve just done two interesting video interviews on this with Charlie Morris, new editor of the Fleet Street Letter, and Edward Chancellor – watch out for those) and this one looks like it might last a bit longer.
• Read the full editor’s letter here: The bottom of the barrel