The Hindu Business Line : Time to invest in commodities: Experts

FROM a macro perspective, commodities are approaching that phase of the global economic cycle when the asset class should be at its most attractive; and there is a strong case for investors to diversify into commodities, according to Barclays Capital.

In its latest report - The Commodity Refiner - the investment banking division of Barclays Bank Plc says that it is time to choose carefully from the commodity basket as the threat of rising inflation, leading to higher interest rates and a downgrading of prospects in equity and bond markets, is already evident in the relatively modest returns generated in these two sectors, particularly in relation to the commodity sector which continues to strongly outperform comparable benchmark indices.

The latest upturn in commodity prices commenced much earlier than in previous cycles, and in many commodity futures and forward markets, price levels are close to record highs.

"We expect the recent positive phase of commodity market returns to persist for longer than in previous cycles, and a very strong case for investors to diversify into commodities still exists," says energy and metals researcher, Mr Kevin Norrish.

He adds that the decision to invest in commodities is now a more challenging one.

Investors in structured products will need to carefully consider which commodities to include and also their relative weightings within the basket.

One factor that should support investment returns well into next year is the expectation that the front end of the futures and forward market price curves in a number of commodity sectors are likely to trade consistently in backwardation, therefore generating positive roll yield, the expert said.

According to Barclays Capital, the energy sector will outperform the rest of the commodity complex in the coming months.

Prices will continue to be supported by strong demand and capacity constraints.

Oil demand is growing at the fastest rate for two decades, and the oil supply system is becoming stretched as a result.

Interestingly, while signs that the US Federal Reserve is willing to raise interest rates to stem inflation have supported the US dollar, the case for gold, and to a lesser degree, the other precious metals, has weakened. The trend is expected to continue.

"It is time to play gold from the short side at least until the market view of inflation threat is raised. In our view, gold will not benefit from its perceived role as an inflation hedge until the US consumer price index moves above four per cent."

On industrial metals, the report expected prices to continue to weaken.

Summer tends to be the weakest period for demand.

In addition, further evidence of a slowdown in China may be expected.

"However, the outlook towards the end of the year is still positive given low inventories, limited supply growth and the strongest two-year pace of global economic growth for three decades", the report asserted.