Commodities still buoyant - The Business Times

Executive Money


Published August 18, 2010

Commodities still buoyant

Thanks to rising demand and growth in the emerging markets, reports GENEVIEVE CUA

COMMODITY investments hit a record US$300 billion in assets under management in July, but will the party continue?

Barclays Capital, in its August issue of The Commodity Investor, believes that strong medium term demand still underpins the asset class, thanks to growth in the emerging markets.

It says, however, that growing uncertainty over the economic outlook has made the choice of investment strategy 'a much more complicated task' than a few months ago. 'A deterioration in growth prospects is perhaps reducing some of the upside in oil and industrial metal markets. However, there would need to be the prospect of some very large shifts in the economic landscape before we could be persuaded that downside risks to prices are very large in all but a few markets,' it said.

Barclays says big swings in sentiment have obscured a steady improvement in demand for most commodities. 'So far this year, global demand has surprised to the upside across regions for both oil and other commodities, and that process has further to run, in our view.'

Recently Goldman Sachs reiterated its 'overweight' call on commodities, even though it pared its 12-month forecast for the GSCI Enhanced Total Return Index to 19 per cent from 21 per cent. Commodities have suffered yet another bout of volatility, no thanks to renewed concerns over whether a double-dip recession was imminent.

Goldman is expecting prices to be choppy, but it also believes that rising demand in the emerging markets is likely to keep the supply balance tight.

Barclays' paper addresses two top investor concerns - the sustainability of demand and the close correlation between commodities and other risk assets. The latter has intensified debate over whether commodities qualify as an asset class.

Barclays is forecasting an 'all-time high' in global demand this year, in markets ranging from crude oil, aluminium, copper, corn and soybean. 'The strength of emerging market demand was a key factor in the much-quicker-than-expected V-shaped recovery in demand experienced in many commodity markets and suggests that this component of global consumption has now reached critical mass.'

While demand slumped in mature economies throughy 2009, demand in emerging markets 'barely missed a beat through the credit crisis', it said. Non-OECD oil demand was negative for only one quarter in 2009. Chinese copper demand turned negative in 2008 and early 2009, but has since recovered to hit a high last year, and is now running past that high.

Barclays expects the key drivers of commodity demand to be China, India, the Middle East and Brazil.

On commodities' role in a portfolio, Barclays believes it is premature to draw conclusions on permanent changes in asset class behaviour based on the last couple of years. It points out that commodities did provide diversification benefits in the early stages of the credit crisis.

Between Q4 2007when banks began to reveal the scale of their subprime mortgage exposures, and the second half of 2008, commodity returns based on the DJ-UBS index were 33 per cent, compared with the S&P500's minus 15 per cent. Commodities began to cave in the third quarter of 2008 along with other asset classes, as markets began to price in massive dislocations.

'The strong link between commodities and other asset classes is neither surprising nor new,' it said, citing other crises such as the Gulf war and dot com bubble. 'In each of the cases, commodities went through a period where they were strongly linked with trends in other markets, but subsequently reasserted their independence.'