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Commodities: A Lacklustre Outlook?

Commodity indices have been underperforming for over two years, so are we nearing the trough?

Andy Brunner 11 April, 2014 | 3:00PM

Even though the main commodity index, the UBS Bloomberg CMCI Composite, has risen modestly recently there have been relatively few gains outside of agriculture. Indeed, it was the only main sector to show positive returns as continuing poor weather conditions led to further rises in many grain prices. Elsewhere, the only moves of note were a sizeable fall in copper and renewed weakness in the gold price.

A global economic background of slower emerging market growth, combined with the reform and rebalancing of a Chinese economy generating a significantly lower trend growth rate, presents a more difficult medium term backdrop for many commodity producers. This represents a departure from the structural bull market witnessed during the last decade and will lower potential returns until capacity tightens again.

This is not a new story and commodity indices have been underperforming for over two years. A large part of the prior upturn in commodities was driven by speculative activity and long-only interest in this new-ish “asset class” has waned. This has become increasingly evident in many commodities and, with emerging markets likely to slow further and supply increasing, crude oil and metal prices will find it difficult to sustain much upward momentum.

Consensus forecasts are for a flat to lower long-term pricing structure. Nevertheless, the near term outlook is more favourable and the recent rally could well continue.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Andy Brunner

Andy Brunner  is an investment strategist with Morningstar OBSR.