2016 was a year of volatility and uncertainty for the natural resources asset class and investors felt the effects. As seen in Preqin’s Investor Outlook: Alternative Assets H1 2017, LPs named commodity price volatility, the slowdown in China’s economy and the geopolitical landscape as the three macroeconomic factors that had the largest impact on their natural resources portfolios in 2016, and that are expected to continue into 2017.
Preqin found that 77% of surveyed investors believed that commodity price volatility had a substantial impact on their natural resources investments in 2016. However, investors were split on what sort of impact commodity prices would have over 2017: 28% expect a negative impact on performance while 33% anticipate a positive impact. Illustrative of the difficulty managers face in estimating long-term profitability, oil prices continue to fluctuate based on headlines and forecasts, with OPEC’s production cuts increasing the prices but better forecasts for US oil output causing prices to sink.
Nearly a third of investors found that the slowdown of China’s economy had a significant impact on their natural resources portfolios. China’s reduced rate of growth cut its demand for the oil, metals and materials that make up the natural resources sector, and consequently affected the returns of unlisted natural resources funds. Many analysts expect the Chinese GDP expansion rate to continue to slow in 2017, and the Chinese Government has pegged its economic growth target at 6.5%, lower than its actual growth rate of 6.7% in 2016.
Political changes affect the negotiation or renegotiation of trade agreements and influence levels of government spending, which in turn affect the investment market. As such the geopolitical landscape ranks highly among investors as a determinant of their natural resources portfolio performance. In 2016, Brazil and South Korea impeached their presidents, Britain voted to leave the European Union and a new president was elected in the US. Already this year, President Trump has signed an executive order to pull out of the Trans-Pacific Partnership, called for Congress to pass a $1tn infrastructure bill and expressed interest in eliminating energy regulations, all of which will affect natural resources fund performance in the coming year.
Investors clearly believe these factors will have an impact on their investments over 2017, and with more than half feeling that their portfolio performance had fallen short of expectations over 2016, fund managers must be able to demonstrate how they will respond to the macroeconomic challenges if they are to be successful in attracting new capital to the asset class or retaining the confidence of their existing LPs.