Commodity performance continued to deteriorate in Q4 2014, marking the worst year for the asset class since the global financial crisis. A perfect storm of factors – the combination of strong supply across most commodity sectors,….
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ETF Securities Research
concerns about demand from China and a strengthening US Dollar – depressed prices and saw global AUM drop US$9.2bn in Q4 to US$101.5bn from Q3 2014. Net flows into commodity ETPs were neutral and the AUM decline was entirely driven by price movements. Investors now appear to be looking at the current environment as an opportunity to increase cyclical commodity exposures, rotating away from more defensive exposures like gold.
The largest inflows into the energy sector on record largely balanced the continued outflows from gold ETPs, resulting in a mere US$30mn net outflow from commodity ETPs in Q4 2014. Gold ETPs saw the largest quarterly withdrawals in a year, totalling US$3.1bn, predominantly from US investors (78%), as confidence in the US recovery grows. US investors also drove the strong inflows into energy ETPs, accounting for 85% of the US$3.2bn total.
Martin Arnold, Global FX and Commodity Strategist at ETF Securities said:
“Investors are returning to the commodity space, attracted by many commodities trading at or below their marginal cost of production. While in the short-term companies and mines can continue to produce even if prices are trading below marginal costs, it is not sustainable in the long-term and we believe that unless we see a rebound in prices, production will eventually be cut. Tighter supply will drive better price performance in 2015.”
The strengthening US dollar has also buffeted commodity performance. The US Dollar rally, however, is being driven by healthy US economic growth – a positive for commodity demand. Meanwhile, policy-makers in both China and Europe have started – and are expected to continue – to react strongly to recent signs of economic moderation.
Cyclical commodities are likely to be the main beneficiaries of the ongoing rise of economic activity in the US and China in 2015. With China continuing to stimulate its economy and budgeting for more commodity-intensive infrastructure spending we believe the outlook for commodities dependent on economic activity looks strong. Cyclical asset exposures will give the best investment opportunities in 2015 on the back of the increasing momentum of the global economic recovery. Nonetheless, there are lingering risks, particularly the growth and deflation threats for the Eurozone and Japan, alongside the fading economic momentum in the UK economy. Our favoured assets are industrially-exposed commodity sectors like metals and energy.”
Key Trends full year 2014:
Commodity ETP AUM fell by US$20.6bn to US$101.5bn by end 2014, as a strong US dollar and concerns about China and Europe growth knocked many commodity prices down towards their production costs.
While tactical investors have remained active in commodities in 2014, the resilience of investor flows reflects the strategic nature of commodity ETP holders.
Close to 100% of the global commodity AUM decline in 2014 was due to price declines, with net investor outflows a meagre US$30mn, as investors appear to be rotating toward more cyclical commodity exposures.
Many commodities are now trading at or below their marginal cost of production, attracting some longer-term “value” investors to individual commodities and sectors, where price moves have been particularly aggressive.
Precious metals ETPs accounted for over 70% of the decline in global commodity ETP AUM in 2014, with AUM dropping by US$14.8bn to US$79bn. The majority of the gold outflows came from US investors, likely a result of reduced defensive portfolio positioning.
Palladium was the only precious metal to buck the trend of AUM declines, gaining US$0.9bn in AUM as the threat of supply disruptions and positive demand environment kept prices supported in 2014. Of the AUM rise, inflows accounted for around half the gain.
With the exception of gold, all other precious metals received inflows over 2014. Platinum and palladium saw the largest inflows with US$432mn and US$376mn respectively, on the back of potential supply constraints from South Africa and Russia.
Energy ETPs saw strong inflows in 2014, concentrated in the final three months as price declines of both crude and natural gas appeared exaggerated. Crude oil ETPs accounted for the lion’s share of inflows, while natural gas represented around 25% in 2014. However, these inflows were largely driven by US investors, who accounted for 85% of the global inflows. The entirety of inflows into natural gas came from US investors, as elevated inventory and mild weather forced prices to the lowest levels since 2012.
Broad commodity index tracking commodity ETPs saw the second largest inflows after the energy sector, receiving US$1.1bn in 2014, indicating strategic investors are starting to view commodities as an asset class that has high relative value, as equity and bond market valuations have become more stretched and commodity prices have declined.
Investors sought greater exposure to grains, which helped offset the outflows from broad agriculture ETPs in 2014. Low prices brought investors mainly into corn and wheat as longer-term investors believe that growing conditions are unlikely to be as favourable this season as last. Meanwhile, coffee ETPs experienced the largest outflows as the potential for an El-Nino event in 2015 could boost supply.
Industrial metal ETPs saw mixed flows, with the net result contributing to an almost neutral US$2mn outflow from the sector. Supply problems for nickel saw ETPs receive inflows in each quarter in 2014 (US$122mn for 2014), while Chinese demand concerns and deal financing supply risks prompted investors to withdraw from copper ETPs (US$52mn). Diversified industrial metal and zinc ETPs also experienced outflows.