Commodities remain an attractive investment option in 2006, says Credit Suisse in a new research note.

The financial firm says it believes the long-term trend in energy and commodity prices should continue in 2006 and the recent price corrections represent a good opportunity for institutional investors to invest in commodities for the first time or to expand exposure to the sector.

Credit Suisse believes positive fundamental data, “is likely to lead to rising oil and base metal prices over the longer term. Within the energy sector, the supply situation remains tight in the face of increasing industrial demand from emerging economies such as China. Excess production capacity continues to be limited as OPEC is the only organization with any depth of spare production capacity. Meanwhile, oil companies, with record profits, continue to return capital to investors in the form of higher dividends and stock repurchase programs instead of investing in new capital projects such as research and exploration.”

“Precious metals are also likely to benefit from the growth in the emerging economies,” it adds. “Credit Suisse expects that demand will increase for precious metals in 2006. Prices are likely to be underpinned by rising demand for jewellery as the economic rise of Asia makes these luxury items more affordable to a broader section of population. Credit Suisse anticipates a 33% increase in demand for gold from India alone this year, the world’s largest consumer of the metal.”

As for base metals, further growth in industrial production should have a positive impact on prices, it says. “Rising energy prices are likely to lead to production shortages of aluminum in the face of continued strong demand. Nickel is also expected to experience a leap in demand with production potentially boosted by the recent consolidation in steel prices,” the firm notes.

“Commodities can provide valuable diversification for institutional investors who can benefit from the historically low correlation that commodity returns have shown compared to the returns of stocks and bonds,” comments Terry Mellish, director, UK Institutional Sales and Relationship Management at Credit Suisse. “It may also be a very useful inflation hedge. Commodity prices 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.”