Hermes Sees Commodities Returning Most in Four Years on Growth

Thursday, 09 Jan 2014 01:40 PM

 

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Commodities will gain the most since 2010 this year and climb at a faster pace next year as the global economy strengthens, Hermes Fund Managers Ltd. said.

The Standard & Poor’s GSCI Total Return Index of 24 commodities will rise 2.7 percent this year and 6.7 percent in 2015, Hermes said in a report today. While it expects gold to remain under pressure, platinum and palladium “look more attractive” and sugar should rebound later this year, it said.

While Citigroup Inc. has said the “super cycle” of commodities gains has ended because supply caught up with demand, global economic expansion will accelerate to 2.8 percent this year from 2 percent in 2013, economist estimates compiled by Bloomberg show. The euro area, the biggest consumer of platinum used in vehicle catalytic converters, will rebound from recession and China, the largest user of copper to soybeans, will grow at almost triple the rate of the U.S.

“There is a strong link between global growth rates and commodity demand, and therefore commodity returns,” Jason Lejonvarn, a strategist in London at Hermes, which manages about $1.7 billion in commodities, said in the report. “Using the above-trend gross-domestic product growth of developed economies as an indicator of future commodity returns, the implication is that 2014 should see a modest 2.7 percent return from commodities.”

The S&P GSCI Total Return gauge declined 3.7 percent since the beginning of January after losing 1.2 percent last year. It was little changed in 2012, fell 1.2 percent the year before and gained 9 percent in 2010. The MSCI All-Country World Index of equities gained 20 percent in 2013 and the Bloomberg U.S. Treasury Bond Index lost 3.4 percent.

Commodity Returns

Commodity returns have been positive in almost nine out of every 10 years when global GDP growth for developed economies was above the historical trend of 2.5 percent, Hermes said. Since 2002, emerging economies’ above-trend growth of 4.6 percent has had a demonstrable impact on returns, it said.

Raw sugar futures slipped 16 percent last year and will probably rebound this year as the market absorbs a surplus, Hermes projects.

Gold dropped 28 percent in London last year, the most since 1981, as investors lost faith in the metal as a store of value. While bullion is unlikely to repeat that scale of decline, it will remain under pressure amid an improving U.S. economy and lack of faster inflation, Hermes said.

Platinum and palladium are mainly used in pollution control devices in vehicles as well as jewelry. Demand will outpace supply for both metals for a third consecutive year this year, according to Barclays Plc.

“Their use in catalytic converters should benefit firstly from continued improvement in developed market economies and secondly from China seeking to implement a range of pollution controls,” Lejonvarn said in the report.

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