COMMODITIES NOW
the YTD return into negative territory. Driving this drop were uncertainties about the global economy, prompted by the IMF’s warning that broad spending cuts will slow growth globally, together with a stronger dollar. However,
the recent sell-off in commodities is
overdone according to Goldman Sachs, “
...and has left us with a return target over the next three months that is significantly higher than in other asset classes,” they say. So it’s ‘in with commodities and out with cash’ as one of the main ‘takeaways’ from Goldman’s latest asset allocation note, with their suggesting a shake-up in portfolio holdings is underway in the short-term.
Globalisation in Reverse Not all equity markets are moving in unison with
the correlation between them loosening. This fall in global ‘connectedness’ may be a sign that we are entering a period where the herd instinct of globalisation is on the wane, making local politics, economics and social factors more important. Some have suggested that professional investors can, once again, perform their market diligence in the time- honoured fashion without having to constantly re- invent their sentiments for fear of being trampled by the ‘misinformed herd’. I doubt it. According to the McKinsey Global Institute
financial globalisation has stalled, with today’s financial markets at an inflection point.1
The
world’s financial assets – the value of equity market capitalisation, corporate and government bonds, and loans – grew from $12 trillion in 1980 to $206 trillion in 2007. This growth has stalled. A reset is required they suggest, hinged on putting in place a solid global regulatory framework to correct the excesses of the pre-crisis years.
“The next leg, given where debt financing levels are, is increased merger and acquisition activity”
As financial assets have stabilised, cross border
capital flows have declined and are now 60% below their 2007 peak ($11.8 trillion). This too points to a dislocation of market correlations. It also suggests that larger regional differences are emerging in the availability of capital. Which brings us to the question of what to do
with all that cash laying around? Companies continue to hoard cash, much of which has been sidelined waiting for policy direction. Corporations are issuing record levels of new debt to extend the average life of their outstanding liabilities and add to cash holdings (as well as buying back shares). “The next leg, given where debt financing levels are, is increased merger and acquisition activity,”
6 March 2013
according to Richard Madigan, Chief Investment Officer at JPMorgan Private Bank writing in the Financial Times.2
“Looking at the recent dollar
value of M&A activity in the US (with the obvious exception of 2009) you would have to go back to 2003/2004 to see similarly anaemic levels,” he reminds us. Many market observers are currently obsessing
with the notion of the Great Rotation – moving money from fixed income (selling bonds) into equities and other ‘riskier’ markets. However, with QE effectively capping interest rates for the foreseeable future, it might be too early to bet on a massive outflow from the bond markets. Nevertheless, the rotation will take place at some point when the global economy revives and loose money subsides. So in our low inflation, low growth world there will be no significant net shift to equities – at least for now. “Inflation is coming,” Madigan confirms “...but
it has to follow a meaningful re-acceleration in growth. This year is going to be better for global growth, although it is likely to remain sub-trend, around 3%.”
Losing The Faith? If correlations between asset classes are returning
to a more normal path it seems incongruous that it is now that the benefits of investing in the commodity sector are brought into question. The chatter has been justified and backed up by some well-known institutional investors scaling back their commodity allocations. One factor, of course, has been the uninspiring
returns from commodities in the past two years – particularly compared to the gains made by equities and even government bonds. Indeed, according to data compiled by Newedge, the average commodity hedge fund lost 1.4% in 2011 and 3.7% in 2012. “Underlying this has been the poor performance
of the two leading commodity indices, the S&P GSCI and the DJ-UBSCI, whose total returns were roughly zero and -1% respectively last year,” explains Julian Jessop, Head of Commodities Research with Capital Economics in London. The financial press have also waded in: Commodities do not fit the zeitgeist declared the FT in February, reporting that Calpers, the influential $244bn Californian state pension scheme “
...caused a stir last month when it revealed it had slashed its exposure to commodities from 1.5 per cent of its portfolio to just 0.6 per cent, pumping the surplus cash into inflation-linked bonds instead.” This has been compounded by the increasing
sensitivity with which regulators, investors and the public regard speculative flows into commodity funds. These, we are told, have driven prices of
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84