ETF Securities, a leading provider of commodity-based exchange-traded products, believes that the prolonged downturn in commodity markets could finally be drawing to a close. Sentiment is near an all-time low, yet there is compelling evidence to suggest prices will rise in 2016, delegates at the firm’s annual investor conference were told.

James Butterfill, Head of Research and Investment Strategy at ETF Securities.

James Butterfill, ETF Securities’ Head of Research & Investment Strategy, said: “Looking at net futures positioning, it’s clear we’re very close to the most bearish position in history. To us this denotes we’re perhaps at peak bearishness. This may not be the opportunity of a lifetime, but it could be the opportunity of an economic cycle at the very least.”

Despite sentiment nearing an all-time low, ETF Securities points out that many commodities are now trading below their marginal cost of production. Global producers are being forced to cut output as this situation continues, helping to lift prices through supply side pressures.

From the demand side, ultra-low crude oil prices may promote economic growth during the year ahead and boost corporate profit margins, causing a ‘snapback’ in commodity prices. Even in China, where the continued slowdown has been a cause for concern, the ‘big four’ industrial metals (aluminium, copper, zinc and lead) are still enjoying local growth in demand of 8.5% per annum on average. ETF Securities argues that if these fundamental drivers can start a correction in the market, this may be sufficient to change investor sentiment and turn speculators onto long positions, further supporting a bull market.

According to Butterfill: “A lot of the fears being discussed – China slowdown, Middle East tension, overextended equity and bond markets, high-yield default risks – really aren’t new. The only thing that is new is what happens after nine years of incredibly low interest rates.

“Markets have obviously taken leave of any fundamentals, and it’s purely about sentiment where commodities are concerned. But sentiment quite clearly follows the price – and history shows that in an environment of rising rates crude and industrial commodity prices usually go up.”

ETF Securities suggests that direct investment may prove to enhance returns in the long run compared to holding equity in the suppliers of the commodity. Potential decreasing dividend levels as well as overzealous capital expenditure cuts that hinder future production may both cause these securities to underperform its underlying commodity.