Are the good times over for commodities market?
A super-cycle was predicted, so why are commodity prices off the boil, asks James Daley
Saturday 14 October 2006
hat has happened to the so-called commodities super-cycle? Six months ago, commodity experts claimed the world had entered a 15- to 20-year bull market. By May this year, the gold price had more than doubled in five years, while the price of oil and copper had risen more than fourfold over the same period. From wheat to nickel to coffee, almost all commodities at least doubled in value over five years, to this spring.
The good times were supposed to continue. And yet, suddenly, commodity prices have come off the boil, as fears of a slowdown in the US economy have given investors the jitters. The Reuters/Jeffries CRB commodity price index is now down almost 20 per cent since May, despite continued demand from Asia, supposedly the underpinning for the super-cycle.
Ian Henderson, manager of JP Morgan's Natural Resources fund, says that the past few months have been a blip. "A lot of very fast money enhanced the commodities market in 2005," he says. "My view is that [short-term movements in prices] are the wrong thing to focus on - the focus should be on what's going on in China."
Although speculating investors have helped to boost commodity prices over the past 18 months, most fund managers and analysts agree that it is the rapid growth in developing countries such as China and India that is behind the recent bull-run.
Henderson points out that the International Monetary Fund has just increased China's growth forecast to 10 per cent for both this year and next year - almost four times the rate at which the UK economy is growing. "The super-cycle argument remains as true today as it was a year ago," says Graham Birch, who heads up Blackrock Investment Management's natural-resources team and manages the Merrill Lynch Gold & General fund.
"The drivers behind it are still the industrialisation and urbanisation of big developing economies, such as China and India. With these countries growing at 8 or 9 per cent a year, they're consuming more of the world's resources.
"We've seen weakness in the market recently because the US economy has slowed down a bit. But you don't expect markets to go in straight lines. This looks like a soft patch in what is a relatively strong market."
Mark Mathias, of Dawnay Day Quantum, which runs specialist commodity investments, is convinced that the recent fall in prices has created a fantastic buying opportunity, though he dismisses the notion of a super-cycle. "The super-cycle suggests we're in a bigger cycle than normal, but commodity cycles are all like this," he says. "The last commodities bear market lasted 20 years, so it's natural that the bull market might go on just as long."
Even so, for most investors, it's sensible to allocate just a small amount of your portfolio to the sector. Commodities are a good way to diversify, as they tend to have a low correlation with other asset classes. While stock markets plummeted in 2001-2, for example, commodities made strong annual gains.
Dan Kemp, head of fund research at Williams de Broë, warns that investors shouldn't get carried away because of recent strong returns: "The enthusiasm we've seen for commodities has very little to do with diversification benefits, and everything to do with the fact their prices have been going through the roof."
Graham Tuckwell, chairman of ETF Securities, says that non-specialist investors should probably begin by allocating 3 to 5 per cent of their portfolio to commodities.
Four ways to invest
* Most private investors get exposure to commodity markets through funds such as Merrill Lynch Gold & General, JP Morgan Natural Resources, or Investec Global Energy, all of which invest in commodity-related stocks such as miners or exploration companies, and are run by specialist managers. See www.trustnet.com.
* ETF Securities launched a range of Exchange Traded Funds (ETFs) last month, which track either baskets of, or individual, commodities. These can be traded like normal shares, and track the price movements of their target. There are 19 individual commodity ETFs, tracking everything from oil to soybeans to cattle. See www.etfsecurities.com.
* Some firms offer capital-protected products. For example, Dawnay Day Quantum launched two such products this week, which qualify for inclusion in an individual savings account and guarantee to return a minimum of 90 per cent of investors' capital. See www.dawnaydayquantum.com.
* You can invest directly in the shares of commodity-related companies, or in the commodities themselves, via derivatives markets, but investing directly is more risky than using a fund manager.
- 2 Mystery man who gave mum heart-warming note on train 'wanted to put a smile on her face'
- 5 Amal Clooney gives excellent answer to fashion question at European Court of Human Rights
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village