Raw Materials Topping Equities With Economic Expansion Intact: Commodities

Commodities are beating equities for a fifth consecutive year, a sign that demand from developing economies is sustaining global growth that drove prices up almost fourfold in a decade.

While the MSCI All-Country World Index of equities has dropped 13 percent this year and yields on Treasuries fell to near-record lows, the Standard & Poor’s GSCI index of 24 raw materials rose 2.1 percent. Goldman Sachs Group Inc. expects commodities to return about 15 percent in the next 12 months. The last time there was a recession, prices slumped 43 percent.

The S&P GSCI more than doubled from a four-year low in February 2009 as shortages emerged. China, the biggest user of everything from energy to copper to cotton, will lead gains in a projected 6.1 percent expansion in emerging economies next year, more than compensating for the anticipated 1.9 percent growth in the developed world, the International Monetary Fund says.

“The odds favor that the emerging world has succeeded in producing a soft landing, rather than a crash landing,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which manages about $340 billion. “A crash landing would make it more like 2008 for commodities, but a soft landing means we probably are in an ongoing recovery, which makes it very likely that commodities go onto new highs.”

Beating Commodities

Ten members of the S&P GSCI have gained this year, led by gasoil, gold and feeder cattle, while the biggest declines were in cotton, nickel and sugar. That compares with a drop in all 10 of the MSCI industry groups. Treasuries returned 9.2 percent, poised to beat commodities and stocks for the first time since 2008, a Bank of America Corp. index shows.

As of Nov. 15, hedge funds and other large speculators held a net-long position, or bets on higher prices, of almost 755,000 futures and options contracts across 18 raw materials, Commodity Futures Trading Commission data show. While that’s down from a record 1.56 million in September last year, it’s 11 times more than at the bottom of the slump in 2008. Commodity assets under management are within 9 percent of the record $451 billion reached in April, Barclays Capital estimates.

The U.S., the world’s biggest oil consumer, expanded at a 2 percent annual rate in the third quarter, the government said Nov. 22. The economy, more than twice the size of its nearest rival China, will gain 2.2 percent next year, compared with a 3.5 percent contraction in 2009, according to the median of 63 economist estimates compiled by Bloomberg. The euro region will advance 0.5 percent in 2012, compared with a 4.2 percent drop in 2009, the estimates show.

Debt Crisis

Europe may fail to grow should lawmakers be unable to contain the region’s debt crisis, which has already toppled governments in Italy and Greece. The cost of insuring European sovereign debt against default rose to a record last week, according to the Markit iTraxx SovX Western Europe Index of credit-default swaps. Germany failed to get bids for 35 percent of the 10-year bonds offered for sale on Nov. 23.

The region accounts for about 18 percent of global copper demand and almost 16 percent of aluminum consumption, according to Barclays Capital. Europe uses 15 percent of the world’s oil, the International Energy Agency estimates, and 19 percent of wheat supply, U.S. Department of Agriculture data show.

$15 Trillion

A U.S. congressional supercommittee failed to agree on budget cuts this month, increasing investor concern that lawmakers will be incapable of containing the country’s $15 trillion debt. JPMorgan Chase & Co., the biggest U.S. bank by assets, cut its recommendation on commodities to “underweight” on Nov. 22, citing policy failures in the U.S. and Europe.

Commodity investor inflows rebounded to $2.1 billion in October, after a record outflow of $10 billion in September, Barclays Capital said in a Nov. 21 report. Commodity assets under management totaled $412 billion at the end of the month, $39 billion below the record in April.

Holdings in exchange-traded products backed by gold increased to an all-time high of 2,351 metric tons Nov. 25, data compiled by Bloomberg show. Gold for immediate delivery has climbed 21 percent this year to $1,712.55 an ounce as of 4:38 p.m. in New York, more than twice the low of $682.41 reached in October 2008.

Global Stockpiles

There are no signs yet of a collapse in demand. China’s October copper imports were the most in 18 months, customs data show. Global stockpiles monitored by exchanges in London, New York and Shanghai dropped 19 percent since March, to the lowest since December, according to data compiled by Bloomberg. Futures declined 22 percent to $7,495 a ton on the London Metal Exchange this year, still more than twice as much as the $2,817.25 reached in December 2008.

Inventories of crude and refined products in industrialized nations fell below the five-year average for a third consecutive month in October, the first time that’s happened since 2004, according to the Paris-based IEA. Stockpiles declined by 11.8 million barrels to 2.68 billion. Crude oil has advanced 7.5 percent to $98.21 a barrel in New York this year, three times the low of $32.40 touched in December 2008.

“Inventory levels and spare capacity in commodities, certainly in the oil sector, are a lot lower than they were in 2008,” said Colin O’Shea, the London-based head of commodities at Hermes Investment Management Ltd., which has about $2 billion in raw-material holdings. “I don’t feel that the demand loss that we could potentially have now is the same as it was in 2008.”

Exceed Production

Barclays Capital expects demand for copper, aluminum, zinc, tin, nickel and lead to rise next year. Combined stockpiles of coarse grains including corn and wheat will drop to the lowest since 2009, according to USDA data compiled by Bloomberg. Global oil demand will exceed production for a third year, the U.S. Department of Energy estimates.

“The emerging markets are going to be an underpinning for overall world demand, as they have become ever more dominant since 2008,” said Patricia Mohr, a vice president for economics and commodity market specialist at ScotiaBank Group in Toronto. “It’s been comparatively quite mild, and I think the reason for that is the emerging markets.”

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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