Op-Ed: Time to bulk up on bulk commodities

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Resources companies were one of the biggest victims when animal spirits were at their worst, could they be among the biggest gainers now that fund managers have a spring in their step?

Too much overcapacity, sluggish growth, debt piles, reduced dividends … Yes we've all heard it before, but 2016 has been another transition year for the sector as mining companies tackled poor balance sheets by selling assets, putting projects on ice and slashing capital expenditure as producers continued to drain the sink after years of increased capacity.

Traders reveled in the bounce in basic resources stocks off their lows this year while many investors eyed it suspiciously.

As 2016 closes out investors are split about the potential for the sector. Some remain nervous about China's economic growth and negative implications for commodities demand, there are genuine fears about a pullback given how much basic resources have already gained and the U.S. dollar's strength looms large as it makes commodities more expensive.

But there is also a subtle shift in the way some investment houses are becoming more open to the idea of a commodities rebound, reflected in a willingness to recommend the sector to clients - the opposite to their calls at the start of the year.

It begs the question, if animal spirits are sustained as fiscal spending from the U.S. and China kicks into gear, will sentiment lift all boats in the bulk commodities sector? If so, it means the crop of new mining bosses brought in for their skills at managing a rough cycle can enjoy what most CEO's crave - riding the wave of an improving cycle.

Citi called the end of the super cycle for commodities back in late 2012, but changed its view to a positive one in the middle of this year. Others have been on board the rally early too, including Impala Asset Management founder Robert Bishop who had a contrarian call that China was on the way up in 2016 - with a hard landing behind it.

Bishop told investors in London this month that he is a bull on one stock in particular going into 2017 - Rio Tinto. Bishop said the stock price can double and the icing on the cake is that shareholders might be surprised with better dividends in the not too distant future.

I pressed him on why Rio over BHP Billiton and he explained - "there is too much oil in BHP's portfolio". The company has what it calls four pillars of growth - iron ore, copper, petroleum products and coal, whereas Rio derives about 80 percent of its profits from iron ore.

Bishop's reasoning is interesting as for much of 2016 fund managers have been more interested in holding energy than other commodities. "Trumponomics" could create demand for commodities, but what is being overlooked is Chinese demand. Bishop said China infrastructure spending will grow 15 to 20 percent next year as the country's corruption campaign winds down and the country turns its attention elsewhere.

Others acknowledge that it's worth reconsidering the sector's fundamentals. Mouhammed Choukeir, chief investment officer of Kleinwort Hambros, points out many commodities are currently trading at steep discounts to their inflation-adjusted long-run averages.

He said perhaps most significantly, momentum for diversified commodities has turned positive as global demand appears to have stabilized. This could be key as investors have been strategic in certain stocks this year, for instance they dabbled in recovery stock Glencore and targeted "best in breed" companies like Rio Tinto. Choukeir believes current momentum in commodities is broad-based and not driven by any single sector, adding further weight to the case that underlying fundamentals in the asset class are reasonable.

But what about the stumbling block of the U.S. dollar? David Bloom, global head of foreign exchange strategy at HSBC, told CNBC last week that the currency's ascent is a freight train but also said higher commodities and a higher dollar can co-exist.

Not everyone is convinced that 2017 will deliver a smooth ride for the sector. For instance many fear "Dr Copper" could struggle amid higher interest rates outlined by the U.S. Federal Reserve and that much of 2016's gains are shaky and can be attributed to speculators in China. Others stew about supply still, and worry that the market is still awash with too much capacity in a world of sluggish weak global growth. But if we truly have a reflation trade and cyclicals are the place to be, then watch for a commodities charge in 2017.

Karen Tso is an anchor on Squawk Box Europe, CNBC and you can follow her on Twitter @cnbckaren.

Disclosure – Robert Bishop does not have a position on the stock of Rio Rinto.

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