JIGNA GIBB, director of Commodity Investor Structuring at Barclays Capital on Specialist Markets
Throughout 2010 there has been a commingling between strong commodity fundamentals and weak investor sentiment. The dampening of sentiment has been primarily driven by macroeconomic pessimism influenced by European debt crisis, tightening financial conditions in emerging markets and potential changes in US banking regulations.
However, after a slow start to the year, the notional invested in commodities soared to $292bn gathering pace as investors’ risk appetite returned and commodity prices were supported by strong macro fundamentals.
As a leading global economic indicator, Freight attracted substantial investor interest in Q1. However, the burden of oversupply coupled with depressed levels of world trade and sluggish global economic recovery weighed down on prices. Growing concerns over the debt issues and general risk aversion resulted in a re-emergence of safe-haven buying, with a flight to quality and increased demand for precious metals.
At the height of these concerns investors flocked into gold exchange traded products (ETPs) with a record $5bn inflows in May 2010, marking these physically backed products as the main feature of investment activity for Q2. Inflows to other commodity sectors were modest in Q2. Investors are gradually positioning themselves for bullish exposure expected for the remainder of 2010 due to the value proposition in crude oil driven by the convergence in OECD and non-OECD demand levels.
Investor enthusiasm for commodities as an asset class continues in 2010. 42% of the total notional invested in commodities ($121.5bn) is accessed via ETPs. These innovative investment products are attractive for investors who are seeking exposure to traditionally hard to reach markets. Exchange traded notes (ETNs) have retained the appealing characteristics of simplicity, liquidity and transparency over other exchanged traded products, however, carrying bank issuer credit risk.
For the rest of 2010, there is a more mixed outlook for commodity prices. As the cyclical economic recovery gives way to a slower growth phase, individual commodity market fundamentals will become more important price drivers once again and this should yield a wider degree of dispersion in price trends across sectors. Shrinking inventories and increased global demand, specifically in China, create bullish scenarios for crude oil, copper and corn.
All three are likely to benefit from increases in imports from China as well as the continuation of increasing demand from other emerging countries and copper specifically with the development of new technologies and infrastructure investments.
Demand is only one side of the equation: in the natural gas markets despite hot temperatures and an above-average hurricane season in the US anticipated, the oversupplied balances limit the longer-term upside. These variations in prices offer profitable and strategic opportunities for investors in commodity markets whether they are investing for the first time or managing an established allocation.
Jigna Gibb, director of commodity investor structuring, Barclays Capital
