Every week, a professional investor tells MoneyWeek where he'd put his money now. This week: Nik Bienkowski, head of research, ETF Securities
Investors have been demanding exposure to alternative assets for several years now for various reasons. Firstly, equities underperformed for some time after the tech bubble popped in 2000. Secondly, studies have shown that the long-term risk/return characteristics of alternative assets are similar to those of equities. Thirdly, alternative assets have a low or negative correlation with equities (in other words, they don't move in tandem with them) and so are a good way to diversify a portfolio.
More recently there has been growing interest in commodities as an asset class. The scale of losses from financial institutions is increasing daily, with almost $50bn raised to shore up balance-sheet problems. The reverberations of the subprime crisis continue to be felt around the world, with equity markets' volatility rising sharply. Real estate in the US and UK is also looking shaky after a long bull run, while hedge funds have concerned some investors because they are often highly correlated during stressed or non-normal markets.
In times like these, particularly when stocks have done poorly, commodities have tended to outperform. On average, between January 1971 and December 1997, commodities showed a positive 12-month return, 70% of the time being when equity returns were negative. And in the worst months for equity returns, commodities outperformed by up to 6% per month. Oil hitting $100 a barrel and the prospect of gold reaching $1,000 an ounce has caught people's attention and the fundamentals of many commodity sectors remain strong.
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All the same, some sectors may not perform as well as others during US and global economic recession particularly industrial metals and oil. The following sectors appear to have a more robust outlook:
Despite performing well last year, the underlying fundamentals of the grains complex (including wheat, soybeans and corn) remain strong. Demand growth continues as emerging-country incomes rise, resulting in increased meat consumption and thus greater call for animal feed, such as soybeans. Corn-based ethanol production continues to expand, while global stocks of wheat, corn and soybeans are falling. Wheat in particular was severely affected by bad weather last year. You can get exposure to a basket of grains (soybeans, corn and wheat) through the ETFS Grains DJ-AIGCI (AIGG) tracker.
These performed poorly last year, but many analysts think they'll do better this year. Demand for cotton is expected to rise on the back of higher prices for synthetics (a substitute for cotton); rising emerging market incomes, which allow consumers to switch to more costly cotton fabrics; and possible crop rotation from cotton to corn. Coffee demand is also growing, especially in low-consumption markets. Sugar has suffered from oversupply, but substitution of sugar for corn-based syrup and increased demand for sugar-based ethanol may support prices in the coming year. The ETFS Softs (AIGS) gives exposure to these three softs.
The gold, silver and platinum markets remain relatively tight. The weak American economy and falling interest rates are putting pressure on the dollar. This is spurring a flight to safe-haven assets most notably to gold. If this scenario continues, we can expect precious metals to get pulled along for a golden ride. However, higher palladium supplies may see palladium being left behind. A number of gold ETFs are available, including ETFS Physical Gold (PHAU) and Lyxor Gold Bullion Securities (GBS).
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