Investors should be taking a longer term approach to commodities for their diversification benefits rather than being overly concerned with trying to time the market, counsels Credit Suisse.
The Swiss banking giant adds that it also believes there are strong fundamental reasons not to regard the current interest in the asset class as short term or ‘faddish’.
“One of the most valuable characteristics of an investment into commodities for institutional investors is the diversification benefit they provide to a portfolio in terms of reducing the overall risk of the portfolio. Commodity returns have a historically low correlation with the returns of stocks and bonds while also providing a very useful inflation hedge,” it explains. “The prices of commodities, which are non-financial assets with no income stream, have tended to rise with inflation, while the value of financial assets typically has declined. In addition, investing in a commodity fund reduces volatility by offering a diversified exposure to different commodity sectors.”
“There has been some comment that investment in commodities is the latest fashion and is therefore attracting what some would regard as ‘hot money’ from hedge funds. It is important to differentiate between the types of investor allocating to the asset class. While there is some speculative money in the market, increasingly we are seeing pension funds investing in commodities in order to add diversification to their portfolios over the long term as part of an asset allocation decision,” notes Jay Bhutani, global energy analyst at Credit Suisse’s asset management business.
“We think the positive commodities story will continue for some time, driven by India and specifically China, which is the world’s biggest importer of many metals. For example it is anticipated that by 2010 China will account for 30% of world consumption in copper, nickel, aluminium and zinc,” Bhutani adds. “India is still in the early stages of importing commodities compared to where it will be in ten years’ time. Income levels in both countries are driving the creation of an urban middle class who – through access to consumer finance – can now afford to buy a flat, which in turn prompts a demand for appliances such as refrigerators and air conditioners, as well as transport vehicles. This demand is increasing the intensity of metals and energy use in these economies and should continue to do so for the foreseeable future.”
Interest in commodities is no fad, says Credit Suisse
Pension funds using asset class to add diversification to their portfolios
- By: James Langton
- March 27, 2006 March 27, 2006
- 11:35