First, there is strong potential in the energy, metals and agricultural sectors. Due to the cross-commodity price linkages, rising energy prices can affect other commodities, such as food. We expect emerging markets to be
the world’s biggest oil consumer by 2015.
Meanwhile, demand for metals is still rising worldwide, fuelled by emerging markets’ demand. Gold continues to profit from its importance as a safe haven, and demand for copper is expected to rise, driven by extensive infrastructure plans in emerging countries.
Demand for agricultural products is driven by population growth, particularly in emerging markets. As the standard of living and incomes rise in these countries, food consumption will shift towards high-quality and protein-rich products, putting further pressure on resources.
Second, emerging economies have been the key driver of the growing demand for commodities over recent years. In China, for example, infrastructure plans will require more copper than China can produce, forcing it to buy copper abroad. China’s growth has also been leading the global appetite for commodities in general. World population growth and changing dietary trends in emerging economies is another key driver of this demand.
Third, commodities offer diversification benefits and may enhance the risk profile of an investor’s portfolio significantly. Historically, commodities have a low correlation with traditional asset classes such as equities and bonds. Although this relationship has changed in the past five years, commodities remain an important portfolio diversifier.
Fourth, commodities have a direct, lagging impact on inflation. As the demand for goods and services increases, the price of commodities used to produce them also rises. A large and persistent increase in essential commodity prices, especially energy, will have an impact on inflation data and expectations. This positive correlation with inflation offers high performance potential in an environment of rising price levels.
Finally, while equities generally follow the overall equity market trend, commodities are driven by demand and supply. Due to their low correlation with equity markets, commodities offer significant return when added to an investor’s portfolio.
