Investors pull out of commodities as demand dries up
ADECADE ago, Alan Gayle at RidgeWorth Investments was among the money managers pouring cash into commodities as a way to profit from China’s expanding appetite for energy, metals and food.
Now, with China slowing and global surpluses in everything from crude oil to grains, almost none of Atlanta-based RidgeWorth’s $43 billion (R557bn) is invested in raw materials. And Gayle, the director of asset allocation, has no plans to return anytime soon.
“The macro fundamentals appeared to have peaked out,” Gayle said. “The bears are in charge.”
Commodity prices that hit record highs in 2008 are the lowest in 13 years, and investors are bailing. Just 2.9 percent of money in exchange-traded funds (ETFs) as of August 17 was tied to raw materials, compared with 10 percent at the end of 2011, when the slump began. Commodity-related assets tracked by Barclays shrank by 38 percent through the end of last year, from a peak two years earlier.
“Anything but commodities at this point,” said Tushar Yadava, an iShares investment strategist in San Francisco for BlackRock, the world’s biggest money manager. “After a super cycle in commodities, its natural to see some clients chase returns in other asset classes.”
Raw materials were an investor magnet at the start of the current century, as China’s economy expanded to become the world’s second largest. The Bloomberg commodity index more than doubled in the six years through 2007.
Those high prices and tight supplies encouraged mining and energy companies to add reserves and farmers to boost yields, while China’s growth began to slow from 14 percent in 2007 to 7 percent this year. That has created surpluses and left the commodity index heading for a fifth consecutive annual decline.
As of June, global commodity assets tracked by Barclays, including mediumterm notes, swaps and ETFs, were at $261bn, down from $420.1bn by 2012 and compared with $500 million more than two decades earlier. BlackRock estimates commodity industry ETFs have seen outflows for five consecutive months through July, the longest stretch since January last year.
Gayle said he began cutting commodities in early 2013 after a seven-year build-up. The firm now held less than 0.1 percent in rawmaterial assets, down from a peak of 4 percent in 2012, he said.
Some investors remain bullish. Central bank stimulus measures intended to revive economic growth from Japan to Europe might spur a recovery in demand, said Jim Paulsen, the chief investment strategist at Wells Capital Management.
“I’m not sure where the bottom is, but I think we’re close,” Paulsen said. “There’s decent reason to suggest that, with a lag, those policies are likely to work to some extent. And if they do, growth in the world will bounce back, for the first time in this recovery, in a synchronised fashion.”
The Federal Reserve may limit those gains. The US central bank is moving closer to raising interest rates, which has sparked gains in the dollar that makes raw materials more expensive for holders of other currencies. The Bloomberg dollar spot index is set to rally for a third year.
Waning appeal
Even the appetite of private pension funds is waning. Only 1 percent of the portfolios of the top 100 alternative-asset managers tracked by Towers Watson was allocated to commodities at the end of last year, less than a third of its share in 2011.
It may get worse. China’s economy probably expanded 6.3 percent in the first half, compared with the officially reported 7 percent, according to the median estimate of 11 economists surveyed in the second week of August.
China’s slowdown is threatening expansion for trade partners in Asia and Europe. Japan’s economy shrank last quarter, in part as exports tumbled. In Singapore, the government slashed the upper end of its growth forecast for this year.
In the EU, barely a quarter of economists in a survey saw the currency bloc’s outlook improving in the short term. – Bloomberg
Anything but commodities at this point. After a super cycle in commodities, its natural to see some clients chase returns in other asset classes.