AMP Capital bets on beat up commodities and rising dollar

AMP Capital New Zealand, which manages more than $18 billion in assets, has remained overweight in commodities and cash, betting that beat-up prices of raw materials don't have much further to fall.

The fund manager kept its key calls on hold from the previous quarter, staying overweight in cash and commodities, and underweight in bonds in the face of low yields globally, head of investment strategy Keith Poore told a media briefing in Wellington. AMP Capital was neutral on equities, listed property and foreign currency compared to its benchmarks.

Poore said AMP invests in a Bloomberg basket of commodities, which is evenly weighted between agriculture, energy and metals, and expected that the weak prices had found a bottom. Global dairy prices, New Zealand's biggest export, have more than halved, after oversupply in the Chinese market sapped demand. Meanwhile, both iron ore and oil prices have sharply dropped, as a slowing Chinese property market weighs on demand for the metal used in building, while oversupply of oil from US production has caused a glut in the market.

"Commodities are a touch lower on the back of stronger US dollar and weaker China data, specifically the property market, but it looks like they could be forming a bottom. I mention the China property market is slowing at a rate as not as sharp as it was previously," Poore said. "The property cycle is starting to bottom and the authorities are stepping up easing because the property market is so important for industrial metals, you think copper, iron ore in particular and even oil because of the energy you need to build things it is pretty important, so that bottom in the property market does suggest that commodities should be finding a bottom."

The local currency has risen to records against the euro and Australian dollar, as New Zealand's higher interest rates lure traders looking for yield. The New Zealand trade weighted index, which maps the currency's performance against a basket of the country's trading partners, has gained some 5.9 percent since the start of the year and recently traded at 80.27, its highest level since July last year when it touched a record 82.03. That level saw the Reserve Bank governor Graeme Wheeler enter the market to weaken the currency, and has repeatedly called its level unsustainable and unjustifiable.

AMP NZ's chief economist Bevan Graham told the briefing that intervention would be unlikely this time around.

"We're strong against exchange rates at the moment that are easing monetary policy aggressively," Graham said. "Yes, that might be unsustainable to have the kiwi/Aussie at 99 cents and where we are against the euro and the yen, but it's justified where that is at the moment given money printing and very easy monetary conditions at the moment. I would say further intervention would be unlikely in those currencies where it is understandable why we are so high.

AMP NZ expects Wheeler will keep rates on hold for the rest of the year, in the face of low inflation, which out this morning showed the annual inflation rate for the year to March 31 was 0.1 percent.

Globally low interest rates remained very supportive for the New Zealand stock market, which is held for its relatively high dividend yield, as well as kiwi bonds, Poore said. AMP NZ expects the US Federal Reserve will begin to lift rates from zero in September, which may cause a "wobble" in markets, particularly emerging markets, but not a collapse and would present a buying opportunity.

(BusinessDesk)