When passive commodity investing came into vogue in the middle of the last decade, proponents such as Goldman Sachs touted the low historical correlation commodities had to equities as a key selling point. Now that about 2 per cent of pension assets and nearly $300bn in retail funds have been poured into commodity funds, commodities and stocks have become joined at the hip over the past 22 months.
With both equities and commodity indices down by a 10th in the year to date amid evidence of a global slowdown, Goldman says commodities can transcend such fears and have a banner performance over the next 12 months. The bank is forecasting that the overall value of its leading commodity index will be 22 per cent higher a year from now, led by gains in energy and industrial metals as WTI crude oil hits $98 a barrel and copper reaches $8,050 a tonne. It says slowing growth has been consistent with rising commodity price indices as long as an outright contraction is avoided.
But basing such observations on a study of past slowdowns led by developed countries may be unwise. All incremental demand for industrial commodities now comes from countries such as China and India. The International Energy Agency’s latest forecast of 1.6 per cent oil demand growth this year assumes a contraction of demand in Europe and the US but growth in developing countries if the global economy expands by 4.3 per cent. Credit Suisse Asia economist Dong Tao says commodity analysts fail to appreciate how volatile Chinese demand could be in the second half given efforts to cool growth. He sees a substantial slowdown.