Last Updated : 05 February 2013 at 20:00 IST
Commodities becoming attractive portfolio for investors, again: BofAML
Source :Bank of America Merrill Lynch
Commodities are now benefiting from a more positive outlook for both roll and spot returns on the back of a cyclical upturn. Another important fact that, cross-asset correlations are breaking down, making commodities a more attractive portfolio diversification tool.
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NEW YORK (Commodity Online): Commodities are becoming an attractive portfolio component for investors despite the slump seen in 2012, said Bank of America Merrill Lynch in a report.
Commodities may have underperformed other assets on a risk-adjusted basis in recent years and have suffered from a period of high correlation to better performing risk assets such as equities, the report stated.
Commodities are now benefiting from a more positive outlook for both roll and spot returns on the back of a cyclical upturn. Another important fact that, cross-asset correlations are breaking down, making commodities a more attractive portfolio diversification tool.
As Central Banks aggressively print money, investors think commodities remain the best hedge against unexpected inflation.
In 2012, commodity returns fell behind returns in other major asset classes, such as equities or bonds. In fact, performance has been a drag for the last two years as annualized MLCX TR commodity returns were -0.5% with a volatility of 18.8%, compared to Treasury bond returns of 5.5% with a volatility of 2.1%, or returns for the S&P 500 TR of 10.3% with a volatility of 18.8%. So rolling Sharpe ratios for the key commodity indices do not look very appealing compared to other asset classes.
The under performance of commodities has come at a time where price-adjusted allocations remain at a multi-year low. However, cross-asset correlations have started to normalize.
While commodity performance has disappointed many investors due to poor risk-adjusted returns and high correlation to other risk assets, it is worthwhile noting that the tables are starting to turn for the asset class.
For starters, equity correlations with commodities have declined meaningfully in the last six months and are now back near pre 2008 levels in many cases. Similarly, both High Yield and Emerging Market bond returns are no longer highly correlated to commodities.
In short, as global financial markets have started to normalize, the portfolio diversification benefits of commodities are coming back.
