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Scott Wolle, Invesco

Commodities: Is the bear market near its end?


Commodities have had a tough time since the global financial crisis, but are we starting to see the light appear a little sooner than forecast? Scott Wolle (pictured), chief investment officer for the Invesco Global Asset Allocation (IGAA) team, highlights why they maintain a constructive view of commodities and the role that they can play in Invesco’s portfolios…

On the surface, 2014 looks to be a tough year for commodities, as multi-year projects increase the flow of supplies to market even as demand has turned tepid, especially in emerging markets. However, a deeper look at the history of this asset class suggests that the outlook for commodities might turn around sooner than many expect.

The excess returns provided by commodities over cash have historically had a very high correspondence with global gross domestic product (GDP) growth. In short: when global GDP accelerates, commodities have tended to do well — in particular, the more cyclical commodities like oil and copper.

Since the consensus view is that global GDP growth is poised to accelerate in 2014, this historical trend may bode well for commodities this year.
Looking at the history of bear markets for commodities also suggests that the worst could be behind us in the current bear market.

There have been four commodities bear markets in modern times, starting in 1974, 1980, 1997 and 2008. Right now, the current bear is five and a half years old, and prices are still only just over half of what prior peak levels were in 2008.3 This is nearly the worst experience for commodities in modern history. That’s not to say that prices can’t get worse from here, but to assume that the next few years will continue to be poor for commodities is pushing against market history.
While the current bear market has been tough for commodities, we believe that for us in our role as investment managers, to abandon the asset class could prove to be short-sighted. Not only could we miss a potential upturn, but we could lose out on the inflation-hedging benefits that commodities have historically provided to portfolios.
Taking advantage of the current market environment is a natural thing to do when positioning a portfolio, but for us it is important to maintain a diversified core that can help provide resiliency against unexpected events. For example, as the US Federal Reserve (Fed) plans its exit from aggressive monetary policy, it’s not clear exactly what the effects might be and what could possibly go wrong. Might the Fed taper its asset purchases too slowly and create inflationary pressures? If so, we would expect inflation-sensitive assets like commodities to potentially perform well versus stocks and bonds.
Due to the experiences of the past, combined with the uncertainties of the future, we maintain a constructive view of commodities and the role that they can play in our portfolios. More specifically, we believe due to their more cyclical nature, commodities such as oil and copper, represent the most attractive opportunities within commodities right now, versus others such as agriculture and precious metals.

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