Deep dive: Opportunities in commodities

James Marlay: It has been a great run for commodities, which WAM Leaders has participated in. I am keen to know what you think the next opportunities within that sector are, where does it head from here? We have record high iron ore prices, how are you playing the space?

John Ayoub: As Matt mentioned earlier, iron ore is probably where we changed our view and if we spoke this time last year, we were of the opinion that China was the first in and they will be the first out, and the way they were going to lead us out was by stimulus. As that stimulus and credit starts to roll off, we think the iron ore price is somewhat unsustainably high right now. That is not to say demand will not remain robust for this year but as we have seen there are some certain measures that the Chinese government are trying to enact to reduce the cost of iron ore. That will take to two to three years to fully play out. Where we are now, we have seen the cyclical restocking and we are probably going to start to see that unwind over the next two to three months and we think iron ore should be under a little bit of pressure on a short-term basis, and costs should start to creep back in from that perspective.

We then switched and went from iron ore into more base metals, copper and nickels where we have always been positive. They have had a really quick re-rating, particularly stocks on the back of what people have been calling the super cycle, which we probably have a slightly different view on. We still think there are pockets of opportunity and those pockets of opportunity lie in stocks like South32 (ASX: S32), where it has some forgotten commodities like alumina, aluminium and manganese, and it has its own self help from a capital management perspective. We still see pockets of opportunities in stocks like South32.

James Marlay: John, the oil sector is one space that you have been constructive on in the past. Are you still positive on the outlook for oil and what are some of the ways that you are playing that sector?

John Ayoub: We have been astonished with how the Australian oil sector in particular has underperformed its global peers. Stocks like Oil Search (ASX: OSH), Santos (ASX: STO) in particular, have lagged some of their global peers. From that perspective, we think there is still a catch up trade there. If we take a step back, and consider oil and the focus right now on clean energy, we think the reality versus practicality there is a timing mismatch. It is right for all governments globally to start focusing on clean energy going forward, but I think the timing mismatch is significant. For the short-term, oil and liquefied natural gas (LNG) are still going to be predominant sources of energy globally. From that perspective, if you look at the capital expenditure budgets of a lot of corporates, there is going to be a reluctance. There is certainly going to be a reluctance to invest going forward. We think a lot of the incumbents are going to be very well positioned to capitalise on any short-term weakness or lack of focus on those sectors. Oil Search in particular is a stock that we think has plenty of runway to go. We are happy to stand by that one.