Commodities Reach Inflection Point
Commodity returns will take divergent paths as recommendations to actively manage exposures resonate amid higher energy price risk.
By Guy Isherwood
PETROLEUM PRICES HAVE taken control of the commodity complex once again. This was the main cause for a very healthy gain of over 6% for the S&P GSCI index in February. Tension with Iran, the avoidance of a eurozone meltdown (at least for now) and an improving global economic backdrop has generally eased fears and pushed equity markets markedly higher in some places. A weaker US dollar also assisted, as has a backwardated petroleum curve. This optimism has also lifted
industrial metals as the best- performing commodity group so far in 2012. Meanwhile, agriculture continues to lag the rest of the complex. Oh, and let’s not forget gold (for those fixated with this non- commodity) which has performed very well until Ben Bernanke’s quelling of easing sentiment. All this suggests that commodity
price performance will increasingly diverge this year, with supply and demand fundamentals becoming more dominant as economies start to recover and monetary stimulus come to an end. The latest easing from the
100
20 40 60 80
0
Source: Barclays Capital -20
2001 4 March 2012 2005 2010 2011
Commodity MTN Issuance Exchange Traded Products Commodity Index Swaps
US, Europe and elsewhere could be the last for some time. Correlations within commodity sectors will continue to break
down requiring greater selectivity and nimbleness in response to price moves. This is good news for the sector (and certainly for active managers) which is why – almost universally – serious commodity commentators suggest seeking an active fund manager with a focus on those sectors most likely to add alpha to portfolios, as well as helping clients take advantage of the current multi-year boom.
Investment flows into commodities fell dramatically last year ... the weakest in nearly a decade
So if we really are finally in a recovery phase in the OECD,
with China on for a ‘soft landing’, investors should be seeking exposure to commodities with strong fundamentals. As a result of this more bullish outlook, investors have returned
to commodity investments once again. Following the second largest monthly outflow ever from commodities in December, investments have rebounded – the first time since July 2011 that all investment categories and commodity sectors had inflows, with precious metals ETPs receiving the largest share of investment according to Barclays Capital. Investment flows into commodities fell dramatically last year
Commodity Inflows to Rebound ($bn)
(by 78% to $15 billion), the weakest in nearly a decade. However, BarCap expects commodity investment flows to continue to rebound in 2012 and their latest survey of commodity investor sentiment shows that 56% of respondents expect to initiate or increase their commodity exposure over the next three years. “So far this year, value
strategies have outperformed other sources of excess return for commodities. Our view suggests value will continue to outperform. This is consistent with our expectation of significant upside potential across a number of commodities markets (particularly base and precious metals),” according to BarCap’s 8th
annual survey
of institutional investors. It shows that despite the turmoil of recent years, investors still value commodity assets for
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