Mark Mobius is piling into commodity stocks in China, saying that a rebound in raw-material markets is only getting started after prices sank too far and that gains may be extreme.
Templeton Emerging Markets Group will add more raw-material stocks from Asia’s top economy, according to Mobius, executive chairman of the group, who’s been investing in emerging markets for more than four decades. Many of them will be good holdings for the long term, he said in an e-mail interview, without identifying particular companies.
China’s commodity producers, which were the worst mainland equity investments over almost a decade, have led this year’s rebound as China boosted stimulus and local investors swarmed into the nation’s futures markets, with bets on everything from steel bars to cotton. The Bloomberg Commodity Index rallied for a second month in April, and assessments are stacking up that the worst of the rout is now over, including from industry veteran Tom Albanese, a former head of Rio Tinto Group.
“We have already seen how both commodity prices and the commodity stock prices went down too far, beyond realistic assessments,” Mobius said. “We can now expect movement on the upside to be extreme in percentage terms. If there is a move down, there is a good chance that we would increase.”
The Bloomberg Commodity Index, a measure of returns from 22 raw materials, surged in April to extend a rebound from the lowest since 1991, and has gained 6.5% this year. A measure of materials producers on China’s large-cap CSI 300 Index rallied 27% from the January low to a peak in mid- April, before losing about 5%. Not everyone is bullish about the outlook. Commodity prices may ease in the third and fourth quarters, Graham Kerr, head of miner South32, said at a conference in Sydney last week. 
Goldman Sachs Group said in a note dated April 22 that while there were signs of a revival, including gains in oil, it was premature to embrace these so-called green shoots.
China’s investors have honed in on raw materials this year amid signs of a pickup in demand after policy makers talked up growth and the property market rebounded, with rebar, coking coal and cotton all surging. 
Still, the explosion in futures trading alarmed regulators and prompted exchanges in Shanghai, Dalian and Zhengzhou to boost fees and issue warnings.
“There is no question that derivatives and specifically commodity-futures prices have an impact on real prices,” Mobius said. “There is of course a knock-on impact on stock prices of commodity companies since the market takes its lead from commodity prices even if those prices may not be realistic, and unduly impacted by futures prices.”
Mobius has been consistent in recent weeks in signalling his optimism. In February, he told Bloomberg TV that Templeton Emerging Markets was buying Chinese stocks selectively on speculation assets will rebound towards the year-end, and this month said he expected oil to rally back to about $60 a barrel.
While commodity markets will remain volatile, the long-overdue uptrend will continue, according to Mobius. “Many, not all, of the companies are good investments for the long term and even, in some cases, for this year,” he wrote. “Yes, the rising trend is sustainable but keeping in mind the volatility.”