Commodities bull expected to run further

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GLOBAL - Asset managers are predicting the bullish run in commodities will continue against the backdrop of the subprime crisis.

“Increasing global demand, supported by the acceleration in the pace of economic development of emerging markets and constraints in supply, have pushed the oil price up every year since 2003. As efforts to expand supply capacity lag global demand growth in 2008, we expect this trend to continue,” said BNP Paribas’ senior oil market analyst Harry Tchilinguirian, speaking at the third annual Dow Jones Indexes AIG Commodities Outlook in London.

Soil erosion, desertification, urbanisation, shrinking water reserves, land diversion from its traditional uses and a rapid global population growth have resulted in a decline in grain land per capita, which in turn constrains supply of agricultural commodities at a time of rising demand - particularly in emerging countries - and rapid capacity expansion of the biofuels industry, according to Mehdi Chaouky, fundamental analyst at Diapason Commodities Management.

“With stocks at historical low levels, rising costs of production and the comeback of inflation in the real economy, agricultural commodities prices should reach levels never seen before and bring with them meaningful opportunities for investors,” he added.

The base metals sector is likely to feature a wide spread of returns on the back of a cyclical slowdown in demand and a modestly stronger supply side performance, suggested Michael Jansen, base and precious metals strategist at JPMorgan.

“The precious metals sector will be the outperformer and expected to benefit from a weaker US dollar, strong micro economic fundamentals and ongoing robust investor interest,” he added.

This bullish outlook from commodities analysts comes at a time when more European pension funds are considering long-term commodity investment.

“We do not expect a spillover from the subprime crisis into long-only commodity indices. We have seen continued interest from investors in the commodities futures market. This interest has been driven largely by the growing understanding of the importance of diversifying one’s portfolio by blending together different asset classes. Pension funds typically allocate 3-5% of their portfolio to commodities,” said Daniel Raab, managing director at AIG financial products.

The Dow Jones AIG Commodity Total Return Index is so far up 8.5% this year.

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