UK - Increasing correlation of the commodities market with that of equities, and the possibility of prices dropping in the future, indicate it is not wise for institutional investors to look to commodities for diversification, Legal & General has claimed.
Head of asset allocation Julien Garran (pictured) forecast big changes in the fundamentals of the commodities market, namely an increase in supply coupled with less demand.
Garran explained that until recently, producers of basic goods were on the winning side of the equation while the consumers of value added services were dealt a low blow.
However, he predicted this is all to change with the consumers coming up on top. “It is the people who buy and sell services that are gonna be winners, not the commodities investors,” Garran declared.
He said the futures curve is in “contango”, meaning that the futures price is higher than the current price. This therefore showed that the returns will not be too good and thus should discourage pension funds and other institutional investors from investing in commodities.
Amidst the buzz on commodities, Garran said he never advised his clients to invest in commodities as a way of diversifying. He noted that since the correlation with the equities market was on the rise, commodities could not really classify as a genuine diversifier.
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