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IPE special report May 2018

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Time to reconsider commodities allocations, consultant argues

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Investors should reconsider commodities as the sector shows signs of a marked resurgence after years in the doldrums, analysts at investment advisory firm bfinance have argued.

“After a decade of poor performance, many commentators delivered a more bullish outlook for commodities during the first quarter,” the firm stated in a report. “Such predictions are buoyed by global economic growth and some helpful market dynamics.”

Toby Goodworth, head of risk and diversifying strategies at bfinance, said that the core tenets for allocation to commodities – inflation protection and diversification – “still hold true”.

“Yet some market participants have cited a long-term turning point in the decorrelation between commodities and equities in early 2017, with the two markets appearing to be more positively associated through the last year,” he added.

“With potentially weaker diversification characteristics, investors with passive commodity exposure may be more inclined to consider an active approach.”

In February, Goldman Sachs, the investment bank, said it saw potential returns of 15% on its commodity index – and 10% over the next year.

Falling commodity prices, particularly the fall in the price of a barrel of oil, which sank below $28 (€21) just two years ago, and bullish global stock markets have combined to dent the performance of the asset class in recent years.

However, due to possible US sanctions against Iran, oil spiked recently at a little over $75 a barrel.

“Commodities are very cyclical and moves can be pretty violent,” said Michael Spinks, manager of Investec Asset Management’s Diversified Growth Fund. “Interest has been low for a number of years as performance has been poor.”

Accessing the market through an “index-based structure” might be more appropriate for investors, Spinks added.

Gold remains a problematic investment, according to a note from the natural resources team at BlackRock, the world’s biggest asset manager.

“We see both headwinds and tailwinds for gold today and our base case is that it remains range-bound this year,” its report said. “Economic growth expectations have improved, dampening investor appetite for ‘safe-haven’ assets like gold.”

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