UK - Commodities are poised for strong price performance in 2005 on the back of the weak dollar and by a growing inflation threat, according to Barclays Capital.
“We will see much higher prices for much longer than we’ve seen before,” said Kevin Norrish (pictured), head of commodities research at Barclays Capital. “Commodities are an essential part of any institutional investor’s portfolio.”
Commodities are negatively correlated to the dollar, because most prices are dollar denominated. This strong negative correlation is particularly evident in the oil market, as OPEC ministers have said that they are concerned of the effect of the dollar’s fall on rising oil prices, Norrish noted. Commodities will also outperform in inflationary periods, making them a good hedge, he added.
Despite the surge in commodities prices last year, which can also be partially attributed to skyrocketing demand from China, there are good opportunities in existing markets, and new developing markets such as coal, freight, gas, power and emissions trading, which offer “potentially highly liquid new alternatives,” Norrish said.
Additionally, resource companies’ need for new investment in areas such as mining and exploration offer opportunities “further out along the commodity price curves,” are an opportunity for higher risk investments in the area.
However, a recent poll by Barclays Capital found that 67% of 150 institutional investors, including pension funds, private banks hedge funds were not invested in commodities, and 21% had 1-5% of their portfolios invested in commodities. Although more institutional investors were expected to invest, or increase their allocations to the asset class, most cited a transparency, price levels and liquidity as primary concerns about commodities. Those who were invested in commodities preferred either passive index/basket products or a mix of active and passive products to active or fixed income products. The main reason for investing in commodities cited was diversification, rather than as a dollar or inflation hedge.
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