Recent years have seen a profound
re-appraisal by many financial market players
of the merits of commodity-related investments,
both in terms of the companies that
extract, refine, transport and market such key
building blocks of modern economies and
directly in those commodities themselves,
their financial derivatives, and especially in
indices of those commodities.
Commodities
have once again risen to prominence,
after a long period in the shadows.
The current market cycle has seen (at least
until the recent turmoil around sub-prime
mortgages) most asset classes appreciate in
price in a high-liquidity, low inflationary
environment, fuelled by easy credit conditions
and additional liquidity from arbitrage
between low- and high-yielding currencies.
Correlations-with prices tending to move in
a similar direction or magnitude-increased
across many asset classes, and risk premia
between lower- and higher-risk investments
were pared in the search for returns from a
seemingly exponentially expanding pool of
global investment capital.
Whilst these
processes have played themselves out, commodities
have once again risen to prominence,
after a long period in the shadows.
The stock market fall-out of 2000-2003 temporarily
reduced some attractiveness of equities
for long-side investment, while falls in
interest rates put yields for more secure
investment grade bonds under pressure.
As a
result many investment managers have
returned to commodities in one form or
another in their search for alpha returns, and
for themes to attract the ever-growing global
pool of funds looking for a home.
Commodities have attracted their attention
for a number of reasons, not least their
recent upside price performance, their negatively-
correlated portfolio diversification
benefits against stocks and bonds, and as a
hedge against inflation.
According to recent
research, they have a happy knack (when
aggregated in indices of commodity futures,
at least) of tending to perform at their relative
best exactly when stock and bond markets
are at their most vulnerable, during the
late periods of expansion and early periods
of cyclical downtrends in the business cycle.
Created: January 2, 2007
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This article is taken from November 2007 edition of Platts Insight magazine.
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