After five years of consecutive declines, has the commodities market finally bottomed? With a leading index up 7 per cent from the start of the year and a jump in investment flows into the market, some investors are daring to be optimistic although others remain resolutely on the sidelines.
“We think that this is a turning point in investment flows in commodities,” says Kevin Norrish, head of commodity research at Barclays. According to the bank’s latest research, commodities saw investment inflows of $54bn during January and August, an all-time high for the first eight months of the year. If the current trend continues, 2016 will mark the first year of net inflows into commodities for the first time in four years.
Worries about global economic growth have fuelled money into gold, as has the desire of investors to benefit from volatility in individual commodities, says Mr Norrish.
Gold has been by far the single most popular commodity investment in 2016, with flows into physically backed exchange traded products climbing to a net $27bn. This comes after three consecutive years of net outflows from gold ETPs and is already far ahead of the previous record set in 2009.
There also seems to be a revival in the notion that commodities are a diversification and inflation hedging tool, with investors buying into index-linked products. Pension funds and other long-term investors typically buy exposure to the sector through swaps on commodity indices that cover oil, agriculture and metals, such as the Bloomberg Commodity Index, or BCOM.
Mr Norrish adds that 2016 could become the first year of net inflows into commodities indices linked investments since 2012, which could mean that “long term investors are getting involved again”, he says.
There are several signs to encourage the optimists. The total return on BCOM — which includes the “roll yield “ or the gains made as investors roll over their position, and yields on collateral — is 7 per cent. This compares with a 9 per cent total return for global bonds and 6.4 per cent rise for the S&P 500, including the reinvestment of dividends.
Positive sentiment has spilled over into resource linked equities.
George Cheveley, portfolio manager at Investec Asset Management says: “We are seeing inflows and more interest in our resource equity funds, particularly in the Investec Global Gold fund.”
Miners such as Anglo American, BHP Billiton and Glencore are also attracting interest. “They have reduced debts and are generating cash. The coking coal and manganese price spikes, better than forecast iron ore markets, the tightness in zinc concentrates and speculation of more nickel cuts,” he adds.
Nevertheless, the big question is whether the inflows will be sustained. During the past few years, commodities have experienced several months of net buying, only for investors to turnround and sell their holdings.
This year, for example, PowerShares DB Commodity Index Tracking ETF, the biggest such instrument holding a basket of commodities, has seen the first net inflow since 2012, investors have been selling out in the second half of the year. But net inflows into the ETF year-to-date have totalled $92.55m, down sharply from $262m midyear, according to data from ETF.com as money has come out of gold and oil funds.
Indeed, some fund managers believe that gold and oil may have hit this year’s peaks. Geoff Blanning, head of commodities at Schroders says: “We think probably the best gains of this year for some of the main commodities have been realised,” although he adds that natural gas, sugar, and coffee could continue their ascent.
Brent, the international crude marker, is up 23 per cent from the start of the year as the possibility of output cuts by Opec and leading non-Opec countries have supported the market, although it has failed to sustain a rally over $50 a barrel. Sugar has rallied almost 50 per cent on adverse weather in key growing regions while coking coal has become the leading performer in 2016, rising by about 160 per cent on a rush of Chinese demand amid limited supplies.
In contrast, other raw materials, such as grains, have been depressed by this year’s bumper harvest.
Michael Strobaek, global chief investment officer at Credit Suisse’s international wealth management business, expects investors to seek alternative assets as they continue to hunt for yield in the era of historically low interest rates.
Although some commodities are seeing a rebalancing of the individual supply and demand situation, he has a cautious outlook industrial metals given China’s soft industrial output growth as gold trades sideways for the time being. He says: “Given the diverging sector outlook within commodities, we reiterate our neutral outlook for the asset class overall.”
It may take some convincing to lure back some of the institutional investors and investment committees who were hit over the past five years by a continuing bear market. Mr Blanning says: ““Institutional investors are really not looking at [commodities] yet. The asset class will only get their attention properly after prices have moved considerably higher.”