Commodity rout unnerves investors

Added 14th December 2015

The pain felt among energy and mining producers looks set to worsen as investors concerned about default rates have started cutting their exposure to the sector.

Commodity rout unnerves investors

NN Investment Partners revealed this week that it has removed the small overweight it held in the energy sector.

“Oil services companies are struggling and defaults are rising. The sector is cash-flow negative, financial leverage has risen to the highest since 2000 and trailing dividend payout ratios are above 70%, which is unsustainable,” the firm noted.

“Also, the mining sector is in dire straits being cash-flow negative and with profitability under pressure,” NN added.

Jim Leaviss, head of retail fixed interest for M&G Investments, noted that the commodity rout has caused a fundamental deterioration in the US high-yield market.

“US high-yield bonds were the underperformer of 2015, continuing the damage that started at the end of 2014 as energy-related bonds (rigs, pipelines, exploration and refining) started to discount a prolonged fall in oil prices and as other commodities (copper and iron ore) hit their lowest levels for years, bonds exposed to metals and minings also sold off,” Leaviss said.

"US high-yield spreads are 150 basis points wider than at the start of the year and flows have turned sharply negative."

BlackRock said this week that the collapse is reviving concerns over issuers in the high-yield market.

“US high-yield spreads are 150 basis points wider than at the start of the year and flows have turned sharply negative … In the US, energy stocks are now trading at the steepest discount to the broader market since at least 1995,” Russ Koesterich, BlackRock’s chief investment strategist, said.

JO Hambro noted earlier this month that a confluence of supply-side shocks and demand stagnation would result in a structural, decade-long, bear market for commodities.

AXA Investment Managers is of the same opinion. The firm stated earlier this month that the world “is seeing an end to petrodollar surpluses and a divestment phase, which will have implications for assets held by commodity-based sovereign wealth funds”.

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