JPMAM's Henderson confident in long-term commodity prospects

Although uncertainty prevails on global stock markets, taking a selective approach to natural resources appears to be a resilient strategy, according to Ian Henderson, Portfolio Manager of the JPMorgan Natural Resources Fund.

Henderson believes that three main tenets underpin his positive conviction regarding the attraction of the sector over the long-term, namely: population growth, infrastructure demands and compelling valuations.

Population Growth and Infrastructure

Henderson is quick to point out that: "One cannot speculate about a continuing commodities boom without acknowledging the underlying reasoning for the surge. And this demand is energised by fast growing populations and the infrastructure needed to support their evolving needs."

After the Second World War the global population nestled around the 2 billion mark, and now hovers around 7 billion. This is rising by 70 to 80 million a year, and most of all within emerging markets - those with the most voracious appetites for natural resources.

Henderson continued: "It's a self-propagating cycle. A huge drift towards the cities accelerates with urban populations in India and China currently standing at 29% and 40% respectively. Compare this though with the US which currently stands at 81%. As this drift continues in emerging market countries, more steel is needed to build the new railways, more coking coal is needed to smelt the steel and more energy, whether it be coal, oil or uranium to name a few, is needed to power the railways and the new homes. And all of this has little to do with the relatively short-term effects of credit crunches, recessions and belt tightening around the world as they are largely government mandated projects. These will continue as nations recognise the need to spend on their infrastructures to further increase their wealth, irrespective of short-term blips."

Oil

Regarding the price of oil, Henderson commented: "Oil may have dipped recently but not a week passes without intense oil price conjecture and resulting ‘end-of-the-world-as-we-know-it' dysphoria. But its price is not so much governed by mere speculation. I cite a combination of production problems and geopolitical issues as being the main factors with little spare capacity in Saudi Arabia, Nigeria and Mexico and the potential of further unrest in Iran. Not forgetting demand such as the rapid profusion of cars in China."

Obviously the current high price would rocket even further if there actually was (more) conflict in the Middle East, and it would probably take some time for this to recede, even if fears were largely unfounded. New oil production is also a real problem as it requires billions of dollars of investment and Western companies don't often have access to the key oil pockets. This situation is made worse with nations taking a more covetous approach - often for self-preservation reasons - as is evident with the ongoing skirmishes between BP and its partners in Russia.

Adding to the frail bottom line, Henderson believes that even if Saudi production was increased soon, the likelihood is that the extra flows would be consumed locally and never make it to the pumps in the West. So, for as far as we can look ahead, the prospect of a high oil price is increasingly plausible. Investors should not be concerned that valuations are stretched as many commodity prices are up strongly on year leading to upward earnings revisions. The scramble for attractive reserves to production is keeping corporate activity huming. Henderson and his team identify excellent value in the smaller and medium sized companies that have significant return potential.

He concluded: "Commodity markets have and probably always will be volatile over the short term but I can see no reason why growth over the next 10 years or more should not mirror that of the previous 10 years. With global population and infrastructure growth continuing, so too will the want and need for resources especially within emerging markets so it seems almost foolhardy to dismiss the current run as unsustainable."