* Commodities to underperform until global growth is
* Net inflows in commodity index swaps in Q3-Citi
* Equities, commodities show least correlation since 2008
By Eric Onstad
LONDON, Sept 24 Investment flows into
commodities are improving, but broad sector indexes are unlikely
to consistently outperform equities for at least another year,
until global growth gathers more momentum, analysts and fund
Strong commodity gains in August together with a breakdown
in correlations between commodities and other asset classes like
equities is helping to spark interest from investors.
"The view on commodities was pessimistic at best a few
months ago. That seems to have changed, especially after
August," David Hemming, portfolio manager in commodities at
Hermes, told a recent conference.
The rise in commodities in August was driven by metals and
oil, as economic data improved in China, the world's biggest
consumer of raw materials, the euro zone ended a 1-1/2 year
recession and tensions in Syria sparked worries about oil
supplies and boosted gold as a safe-haven asset.
Net inflows of $5.5 billion have been seen so far this
quarter in commodity index swaps, Citi said in a note on Monday.
Liquidations earlier in the year, however, mean that there is
still a net outflow so far in 2013 of $3.4 billion.
In recent years, many investors have favoured bonds while
others wanting more risk have ploughed money into equities,
leading to a sharp underperformance for commodities.
The 19-commodity Thomson Reuters-CRB index has
lagged the S&P 500 equity index by 40 percent over the
past two years, but in August the tables turned and the CRB came
out on top by 6 percent.
That performance shows that commodities are probably in a
transition phase but consistently stronger performance will have
to wait until later in the global economic cycle, said
commodities analyst Kevin Norrish at Barclays in London.
"Long-only indexes have given some positive returns, but
they'll still going to underperform substantially other assets,"
he told the S&P Dow Jones commodities seminar last week.
"It's not really until you get to the latter stage of the
cycle, that's probably the end of 2014 or maybe even 2015, that
we might expect commodities to start generating impressive
Tactical investors are targeting asset classes showing the
strongest returns, said Arun Assumall, head of commodity
investor products at Macquarie Bank.
"What really hurt this year was just how compelling a story
equities were last year and how it panned out," he told the
seminar. "And so it's very difficult to compete and frankly,
rightly so, a tactical guy should have bought equities."
CORRELATIONS BREAK DOWN
Some longer-term investors, however, have been encouraged
that commodities are breaking away from tracking other assets.
Following the financial crisis, equities and commodities
moved largely in tandem in response to waves of risk-on and
But the 30-day correlation between the CRB and the S&P 500
equities index has flipped to a negative 0.19 from positive 0.74
in mid April, showing the least correlation since 2008.
"People are becoming more comfortable with the asset class
and adding commodities as a diversifier," said Edmund Carroll,
global head of commodities at UBS.
Other correlations are breaking down as well, including
between individual commodities within the sector and the link
between the sector and the dollar.
But the lack of strong direction and volatility in most
commodity markets mean that investors must look at strategies
that often rely on physical flows of commodities to generate
"You really need to be in the nitty-gritty to realise those
trading opportunities and a lot of the sell side just doesn't do
it," said Michael Jansen, head of research at fund manager and
metals merchant Red Kite Group.
Other investors are buying physical assets linked to
commodities, such as master limited partnerships (MLPs), which
own energy pipelines, said Michael-John Lytle, chief development
officer at Source, a provider of exchange traded funds.
"You can start to see how that's a good long term investment
vehicle as opposed to something that's going to chop and change
on a weekly or monthly basis."
(Editing by Keiron Henderson)