Commodity returns to underperform, struggle to attract funds in 2014: DB


images (20)Commodity complex will underperform relative to equities and will continue to struggle to attract capital inflows this year.

Deutsche Bank in a weekly report said that precious metals, agriculture and livestock returns have been more resilient and contribute d to the outperformance of the DJUBSCI, whose returns are up 1.9% since the end of last year. On the other hand, SPGSCI has suffered on account of poor returns in energy and industrial metals.

The gains in gold may be short lived as US real economy data recovers and as financial markets across Emerging markets stabilise.

The Gold Forward Offered Rate (GOFO) has moved back into negative territory over the past few days which indicates strong physical demand for gold and extreme stress in global financial markets.

“We would view weakness across EM crisis and soft US real economy data as partly responsible for GOFO rates turning negative and the gold forward curve moving, albeit briefly, into backwardation. The gold market may therefore prove a useful guide to assess the extent to which financial market stress is easing. The fact that the gold forward curve has moved back into contango might indicate this process of markets beginning the process of normalisation is starting to begin.”

With the exception of nickel, industrial metals have been under pressure since the beginning of the year weighed by weaker than expected China manufacturing data and risk-off sentiment driven primarily by concerns over EM. The fears over EM may be overdone, while weather distorted US macro data could pollute market sentiment intermittently.

Looking at short term indicators, the latest CFTC report suggests a lack of strong directional views for copper among the speculative community. It is worth noting that LME cancelled warrants remain elevated indicating further inventory drawdown going forward. As a result, the backwardation in the front end of
copper forward curve has steepened over the past couple of months, Deutsche Bank said.

Investing strategy
Deutsche Bank said it views carry value and momentum to be outperformers in the suite of commodity index strategies.

“Of the risk factor strategies, we expect value and the DB Backwardation Alpha strategy will outperform this year. We view this long-short strategy based on commodity forward curves as likely to work well in an environment where financial flows into commodities is on the wane and where commodity forward curves are increasingly being driven by physical supply-demand fundamentals.”
Source: Commodity Online