THE COMMODITY INVESTOR
Shooting stars
􀂄 Despite a phase of weaker macro-economic data and some signs of oversupply,
upward price momentum is accelerating in a number of commodities markets.
􀂄 A strong end to the year looks likely, with upward price trends in gold, certain
base metals and some agricultural markets looking like they will persist.
Despite moving together with equity markets for a few quarters since mid-2008,
investment flows into commodity markets have come in at unprecedented levels this
year. In fact, with strong inflows in October continuing into November, total inflows
into commodities in the YTD are approaching $55bn, a record year, displacing the
previous record of $51bn achieved in 2006. Sharp falls in commodity prices earlier in
the year created opportunities for long-term exposure, providing an opportunity for
investors to act on their interest in commodities as a diversification tool. The lack of
differentiation between asset classes late in 2008 and in the early part of this year did
dent investor confidence, but, in our view, was a mere aberration from the usual trend
rather than the establishment of a new norm. Indeed, now that fears of an economic
calamity have faded, evidence for the lack of any systematic correlation between
commodities and equity markets has re-merged, as Figure 1 shows. Including
commodities as a part of a global macro trade has now largely run its course, and a
nuanced view of supply-demand fundamentals is coming back into the focus as an
important guide to investment strategy. With more differentiated price performance
within the commodity sectors now likely, commodities are likely to react, on average,
differently than traditional assets to broad macroeconomic trends. Absent any
significant reversal in the macroeconomic outlook, we expect investment flows to
remain strong throughout Q4 09, heading for a record high of $60bn for the year as a
whole and with commodity AUMs likely to end the year at about $230-240bn.
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