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.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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