COMMODITIES NOW
General Risk Aversion; Main Reasons For Cutting Positions
10% 20% 30% 40% 50%
0%
High correlations with other assets
Poor commodity returns
General risk aversion to all growth sensitive assets
Non-commodity related factors
The survey replies suggest that the main reasons commodity exposure has been reduced are not directly related to commodities. A combination of general risk aversion plus other non- commodity related factors (such as a need to adjust currency weightings within portfolios) were chosen by 61% of the respondents. In contrast just 25% cited the high level of correlations with other asset classes and only 14% the problem of low returns as their main reasons.
Source: Barclays Capital
the reasons they always have: as portfolio diversifiers and generators of competitive long term returns. Absolute returns is the second
most important reason to invest in commodities after portfolio diversification, according to investors surveyed by BarCap. But some money managers remain wary about how quickly investors will return to the sector. Sharp price moves have unnerved
some investors, suggesting that new money will enter the sector in a more gradual way. And some of the diversification properties of commodities need to be re- established. As such, a return to more normal relationships between
investment sectors would help. So would a rebound in Chinese growth later in the year. Premier Wen Jiabao’s announced target growth rate of 7.5% for 2012 – the first time in eight years that the figure has been below 8% – suggests not. China will now focus on slower and “more balanced” growth reflecting mounting calls from many quarters for more economic reforms. Nevertheless, “We will move faster to set up a permanent mechanism for boosting consumption,” Jiabao has announced.
Oil Price Risks A rapidly increasing oil price
– in large part caused by the deterioration of relations between Iran and almost everyone else – is beginning to threaten prospects for recovery and healthier growth. Paradoxically, recent rises are largely due to improving economic sentiment and tight supply. In addition, outstanding geopolitical issues present further major upside risks in the months ahead.
“Rising tensions in the Middle East could easily add another $20 – 40/bbl to oil prices
Rising oil prices have recently begun to replace EU periphery Energy Prices Already Close to 9% of Global GDP 10% 8% 6% 4% 2% 0 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Source: IMF, IEA, BP, Bloomberg, BofA Merrill Lynch Global Commodities Research
concerns as a primary risk for many investors. “While the recent rally in Brent crude to $125/bbl can so far be mostly explained by central bank liquidity, rising tensions in the Middle East could easily add another $20 – 40/bbl to oil prices,” according to Francisco Blanch, Global Investment Strategist at Bank of America Merrill Lynch. Energy prices are already close to 9% of global GDP, suggesting further price increases could soon hurt economic growth. Oil is already capturing a higher level of European GDP than in 2008 due to record levels in EUR/bbl.
Primary energy to nominal GDP ratio - World Brent spot at $125/bbl
Commodity Market Inflection Point Barclays Capital noted in their February Commodity
Refiner that for commodity prices in general, there has been a shift back to a fuller consideration of the supply side after a year dominated by demand-side concerns and macro fears. “It is not a straightforward resumption of the
previous cycle after a freeze; there are only echoes and shadows from the first blush of the cycle, during which it became apparent that long-run commodities prices had been systematically underpriced,” say BarCap. Likewise, the current position is not the end of the cycle; “It does not bear the features of any sustainable unravelling of the boom or any general tendency towards a reversion to the initial situation
6 March 2012
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