A VOLATILE ENVIRONMENT
Commodities include many raw foods and materials used in manufacturing, including wheat, cocoa, coffee, iron ore and copper, as well as the more well known examples of oil and gold. Rather than being bought and sold directly by investors – what are known as ‘spot’ deals – they are commonly traded as futures contracts, standardised agreements between a buyer and a seller to exchange an amount and grade of an item at a specific price and future date.
These can change in value as the price of the underlying commodity rises or falls. But these markets can be volatile because they are susceptible to many unpredictable factors – bad weather can destroy crops and industrial action can shut down a mine.
Since the summer of 2014, there has been a sustained drop in commodity prices, most evidently in energy markets. Some of the decline can be attributed to supply issues. Notably, the newfound abundance of US shale oil and gas, and the resulting fight for market share by the Organization of the Petroleum Exporting Countries (OPEC) have led to plentiful supply and falling prices.
When commodity prices fall, EM shares can become good value. For example, as one of the world’s largest energy producers, Russia’s economy is heavily dependent on oil prices. Across various measures of value, its equity market had become expensive over the past couple of years despite geopolitical risks. Yet Russian equity now looks attractive again following the recent fall in oil prices