Investec's George: My three commodities to back in 2012

Investec Asset Management's Bradley George has revealed the three commodities he expects to outperform this year as the market starts to look through the eurozone crisis to focus on fundamentals.

George, manager of the £288m Investec Enhanced Natural Resources fund and the offshore Global Dynamic Resources fund, said of all the commodities to back in 2012, crude oil, gold and potash stood out.

Crude oil

George, head of Investec's commodities and resources team, is backing crude oil - through equity stakes in the oil majors - to benefit in 2012 as the divergence between the higher oil price and the shares of the oil producers narrows.

He said: "Energy majors have de-rated significantly over the last ten years. These companies offer attractive dividend yields covered by impressive free cash generation.

"Despite this de-rating these names remain the premier players in the energy space and as such, tend to command the highest valuations."

He said a powerful catalyst which may cause the oil majors to re-rate would be a resumption of M&A activity which has been largely absent since the acquisition of Petrohawk by BHP Billiton in August.

"According to our analysis, US exploration and production (E&P) companies are currently trading at around $11 per proven barrel of reserves, while it costs US and European integrateds between $20 and $25/bl to develop organically," he said.

"It is much cheaper to buy oil and gas on Wall Street than it is to explore for it, so we believe there is a good chance that the energy majors will be doing just that in 2012 with positive implications for the whole sector."

Gold

The rise and recent fall in the price of gold is well-documented. But despite the tail-off in price at the end of 2011, the precious metal was one of the best performers, rising 10% in total for the year.

George points out the gold miners themselves sold off last year, with the HSBC Global Gold Index off 17.4%, and he expects the decline in share prices to create opportunities this year, regardless of any further climb in gold itself.

"At current prices many gold producers enjoy $1,000 margins, costs appear to have stabilised, and the fall in valuations will help spur a well-capitalised sector into renewed M&A activity."

Potash

While demand for the commodity - used in the manufacturer of fertilisers - has already picked up in recent years as developing economies change diets, potash prices should increase further as farmers look to improve the productivity of arable lands to meet spiralling demands for cattle feed.

George said: "With supply and demand finely balanced, the concentrated potash market has been able to push through material price increases.

"Canadian producers have increased contract prices from $470/t in late 2011 to $530/t for the start of 2012, and we forecast prices to rise to $575/t by 2014 as the supply/demand balance looks to remain in favour of the producers."