Commodities - No sign of bust?

Where many other fund managers and analysts are predicting an impending and so-called 'bursting' of the commodities bubble, Ian Henderson, manager of the £1.1 billion JPMorgan Natural Resources Fund, is defying the naysayers by taking strong positions in the likes of uranium, nickel and platinum.

Only recently, the fund increased its holding of uranium mining companies to 7% and Henderson has increased the fund's gold and precious metals exposure to 27% from around 23% last year, although it was as high as 50% at the end of 2002.

So what are the main drivers behind Henderson's decision making?

Though coal is currently the fastest growing energy source, it is also the dirtiest as far as carbon emissions are concerned. Uranium is currently viewed as the most environmentally friendly form of generating electricity in comparison to other fuels. It takes 150,000 tonnes of uranium to produce the same amount of electricity as 2.5 billion tonnes of coal and with fewer adverse environmental effects. However, demand is currently far outweighing supply.

Demand for both gold and platinum also appears to be showing no sign of a slowdown with a seemingly unquenchable appetite for gold in the relatively new market of China.

Platinum, quite apart from being a sought after jewellery item, is an essential component of catalytic converters.

Henderson commented: "As I said 3 years ago and still maintain now, we have entered an 18 year bull market with commodities - that gives the sector at least 15 years of further growth.

"It's just a matter of looking for the right opportunities and diversifying the portfolio accordingly. With 270 stocks in the portfolio we aim to diffuse any perceived risk without compromising returns and our methodology has proved itself to date.

"Just a few years ago we wouldn't have touched Uranium but now we can see a clear market demand and short supply. Nuclear energy is an increasingly important source with 430 power plants now depending on uranium to generate energy, with 80 new plants under construction or planned for completion within the next 10 years."

On gold, Henderson is just as bullish, pointing out that India makes up 18% of global demand for gold at present and for Hindus, gold is associated with marriage and naming ceremonies. It cannot therefore be subject to substitution and hence is not very price sensitive.

In China, the government has been relaxing laws allowing individuals to invest in, and own gold. Given the dollar weakness, China may also be looking to switch some of its foreign reserves into gold very soon.

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2007-05-25 09:34:05 © Moneyextra.com