Commodity investing to bounce back in 2012

Investments in commodities are expected to increase in 2012 after dipping last year, with crude oil, gold and copper tipped as best performers, according to a Barclays Capital survey

Last year’s volatile market environment led to a year-on-year fall of more than 70%  in commodity investments, but commodity inflows are set to rebound, according to Barclays Capital’s eighth annual survey of institutional investors.

“2012 looks like it will be a stronger year for investment flows, with almost 60% [of investors] planning to increase their commodity exposure over the next three years,” says Kevin Norrish, managing director of commodities research at Barclays Capital in London. “That’s quite a big lift on the result we had last year, with only 45% [planning to increase their exposure to the asset class].”

The report estimates that around $15 billion was invested in commodities last year, compared with an average of $50 billion–60 billion over the previous three years. General risk aversion was investors’ main reason for cutting back on their commodity exposure, resulting in most being underweight the asset class and only a quarter of investors at 75% or more of their target allocation at the start of 2012, according to the survey.

More than half of those surveyed are, however, planning to increase their commodity exposure during the next three years, with direct exposure – such as via exchange-traded products (ETPs) – favoured as the best way to access the asset class.

Conversely, exposure to static, broad-based indexes was the least-favoured option. “Investors like direct commodity exposure, meaning the tracking of a commodity index via swaps or ETPs, for instance,” says Norrish. “ETPs, especially those linked to precious metals, have grown dramatically, as has investing in commodities via dynamic index strategies.”

Among the commodities expected to perform well this year are crude oil, copper and gold. Gold was one of the three worst performers in 2011, along with US natural gas and grains. Gold prices were subject to high levels  of volatility in the second half of last year, falling from a September high of $1,895 per ounce to $1,531 per ounce in December, according to an ETF Securities report, while average monthly gold ETP trading volumes had plunged by 60% to $83 billion in the final quarter of 2011.

The BarCap survey notes that portfolio diversification and competitive returns relative to other asset classes remain popular reasons for investing in commodities, while geopolitical concerns and the possibility of a hard landing in China are cited as the main downside risk to the asset class.


This article was first published on Risk

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