COMMODITIES NOW


Investors to Increase Commodities Allocations ETF Securities, one of the world’s leading independent providers of


Exchange Traded Commodities (ETCs), has conducted a survey which suggests that senior investment professionals across Europe are planning to increase their average allocation to commodities in 2013, particularly into industrial metals such as copper.


In the survey, attendees were asked what their allocation to commodities was in 2012 and how they see that changing this year. Across Europe, the results show that over 40% of investors plan to allocate between 8-10% of their portfolios to commodities in the year ahead.


In addition, just under a third of those surveyed in the UK and


Switzerland were most concerned about the European Sovereign debt crisis, whereas the US fiscal and budget ceiling issues were deemed a greater concern by Italian and German investors.


Nicholas Brooks, Head of Investment Strategy at ETF Securities, remains


optimistic on the outlook for 2013. Commenting at the conferences, he said, “Global growth is showing signs of recovery, with the US and China leading the way. The monetary policy of major developed economies is expected to remain highly accommodative in 2013. Both of these factors are supportive of cyclical assets, with commodities standing out as key beneficiaries. Gold should remain a core holding for investors concerned about the potential for sovereign debt risk events in Europe and the US.”


The results were compiled from four surveys completed by 350 investment decision makers attending their annual commodity investor conferences across London, Milan, Frankfurt and Zurich.


Leading commodity banks including


Morgan Stanley, Goldman Sachs and Credit Suisse, are facing higher capital requirements and tightening regulation that restrict commodities


trading. The Volcker Rule


ban on proprietary trading, together with rules designed to increase transparency in derivatives markets, are among regulations mandated by the Dodd-Frank Act awaiting completion by US authorities.


All rests on whether the recovery in business confidence translates into real demand growth


To reiterate the point, Barclays said commodities trading staff shrank by a third as value-at-risk was cut in half last year as the lender revamps its business. The commodities unit has largely completed restructuring and will focus on “core banking, financing and risk management,” CEO Jenkins said on a recent conference call. It’s a reflection of the times the industry is


facing as the full force of regulations begins to hit traditional sources of trading and finance in this industry. Many international banks have reviewed risk appetite and have withdrawn


their


from, or limited their exposure to commodity trading and finance. This has left a funding gap creating an opportunity for other to


8 March 2013 Footnotes


1. Financial Globalisation: Retreat or Reset, McKinsey Global Institute, 2013. 2. ‘Financial coercion’ heralds return of M&A. Financial Times, 9 Jan 2013.


fill. A number of banks are ramping up their commodity trading and finance activities. Not surprisingly, they are from Asia, Africa and Latin America. For example, commodities financing has become


the fastest growing business for


Singapore-based DBS Group less than two years after it entered the segment, benefiting from the withdrawal of European lenders in Asia, according to CEO Piyush Gupta.


Back to Growth With talk of a commodity ‘supercycle’ now seemingly consigned to the history books, are investors losing faith in the asset class? Not Neil Gregson, who says the emerging world still has at least 15 years of commodity intensive growth ahead of it, dismissing claims that the world’s third ‘economic supercycle’ is over. “Although it is perhaps difficult to believe at


present, the third great economic supercycle is underway.


Since 2000, emerging market


countries have been unlocking their growth potential and facilitating the catch up process. This will last until 2030 and will be commodity


intensive throughout,” says Gregson, manager of the JPM Natural Resources Fund. Despite a recent slowdown in growth, he believes that China will continue to bolster commodities as authorities begin to invest in infrastructure again. Additionally, Gregson claims that India still has “many years


of commodity intensive growth in the pipeline” as urbanisation is set to double over the next 15 years, with 590 million people expected to live in cities by 2030. Concluding, Gregson reminds us that “Any growth surprise in


North America, Japan or even Europe has the capacity to heap yet further pressure on already ailing supply, keeping markets tight and prices high. The current phase is just a pause in the supercycle’s continuing spin.” Whatever your viewpoint, it would be wrong to write-off commodities completely. Their under-performance in part reflects the fact that the recovery has been weak. “Whereas investor demand for commodities has benefited from ultra-loose monetary policies, demand from end-consumers has lagged behind. Correspondingly, if the global recovery is about to enter a much stronger phase, commodities may finally be able to catch up,” explains Capital Economics’ Jessop. All then rests on whether the recovery in business confidence


translates into real demand growth. The signs are good in north America and Asia but the eurozone looks set to contract by up to 2% this year. The crisis there will inevitably flare up again leaving the ECB to do “whatever it takes”. •


Guy Isherwood is Editor of Commodities Now. www.commodities-now.com


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