Commodities Back in Favour, With Cyclical Metals Most Popular

ETF Securities, one of the world’s leading, independent providers of Exchange Traded Commodities (ETCs), published a survey concluding that investors will continue to invest in commodities in 2014, with cyclical commodities such as platinum, palladium..…..

ETF Securities Research

Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities

and industrial metals remaining favourites.

The results were compiled from a survey of 450 investment professionals conducted during the ETF Securities Annual Commodity Investment conferences which took place in Frankfurt, London, Milan and Zurich last month. Polled attendees remarked that commodities remained a favoured asset class in 2014 with nearly 20% of those polled ranking commodities as one of their top three picks.

Cyclical commodities, especially industrial metals were favoured by investors. Platinum, copper and silver were the top three individual picks with platinum coming out well on top with 31% choosing it as their favourite, followed by copper at 26%. Silver followed suit with an average of 15% choosing it as a top performer in 2014. Gold also saw strong interest (with 13%) concluding the metal is still seen as a hedge against potential growth and financial risks in 2014.

 The results confirm earlier predictions that if global economic growth remains on track, commodity performance will follow. Platinum and silver ETPs received the largest inflows in 2013 with USD $1.3bn and USD $841mn respectively as investors shifted away from gold towards commodities more positively correlated with the global industrial cycle.

The two biggest risks investors see in 2014 according to the survey results are

1) a negative financial market response to continued Fed tapering and

2) slower growth than the consensus is now forecasting, with an average of 20% worried about recovery in the United States and 21% most worried about China.

Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities highlighted that:

“Most investors we surveyed indicated they are positive on the outlook for global growth in 2014, with the US leading the way. This likely explains their general bullishness towards broad commodities after three years of underperformance, with platinum and copper top picks. Gold also scored well, reflecting investors’ recognition that if the consensus growth story proves wrong, gold will likely perform.”

Commodities Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.
Equities US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.
Currencies Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.