Like Barclays, UBS (Berlin: UBRA.BE - news) and Deutsche Bank (Xetra: 514000 - news) , it is struggling to make sense of a business where revenues have tumbled since the heyday of the natural resources boom immediately prior to the financial crisis. So is the commodities super-cycle over?
For three reasons, I think the remarkable rally in the prices of energy and metals (although maybe not food which marches to a different beat) may have ground to a halt. If so, this might have big implications for investors.
The first headwind for commodities prices in the future is the likely strength of the dollar, the currency in which most resources are priced. As the US currency rises in value, commodity producers are prepared to accept a lower price because their income remains unchanged in their own currency.
And why should the dollar appreciate from here? A combination of economic recovery, interest rates returning to pre-crisis norms, a better trade balance and structural improvements in America’s fiscal situation. Put these together and I expect a decade-long dollar decline to reverse.
The second key driver of commodity prices is demand and here, too, the outlook points to further declines. The principal reason for this is the ongoing rebalancing of the Chinese economy away from manufacturing, infrastructure investment and exports to domestic consumption.
This, coupled with a slowing in the overall rate of GDP growth in China, means the country, while clearly still a big consumer of resources, will have less of an impact on prices at the margin.
Five years ago, exports and private consumption both accounted for about 35pc of Chinese GDP but in five years’ time those proportions will probably have become 25pc and 40pc respectively, a huge relative shift in only 10 years.
Third, even as demand for commodities is likely to moderate, the supply of energy and metals is expected to increase in the years ahead. This is a natural consequence of a decade of rising prices which has made previously unviable extraction of, for example, oil from Canadian tar sands financially worthwhile.
It is also a result of technological advances, the main driver of the shale gas revolution in the US. So, what does all this mean for investors?
First (Other OTC: FSTC - news) , I think it will be broadly supportive of global growth. Lower energy costs increase disposable incomes for individual consumers and cheaper energy and metals reduce input costs for industry.
Second, weakening commodity prices contribute to the relative attractiveness of developed markets such as the US, Japan and Europe compared with emerging markets.
The West is principally a consumer of commodities and the developing world a producer, although clearly this is a generalisation which will be less true in time as and when the US overtakes Saudi Arabia to become the world’s leading oil producer.
Third, lower commodity prices are likely to lead to lower inflation, which in turn provides central banks with the cover to keep monetary policy looser for longer. In this context, I think the nervousness over the Federal Bank’s tapering of quantitative easing may well have been overdone.
The big problem in many economies is debt, public and private, and that makes them extremely sensitive to rising interest rates. Policy will remain easy for longer than some people now believe.
Finally, easing commodity prices could lead to a reduction in the risk-on, risk-off, macro-driven market movements that have characterised investment for the past few years.
For one thing, the free lunch in emerging markets looks to be over. The rising tide has lifted all boats in the developing world and investors are going to have to be much more discriminating with their emerging market investments.
Winners and losers from the end of the commodity super-cycle will be found at the country level and among individual stocks and sectors. Domestic Chinese airline, US steel maker or Australian iron-ore producer? Working out where in the supply chain the real pricing power resides will be key.
Trading commodities may not be very rewarding right now but it’s never looked a better time to be a bottom-up global stock picker.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63