Growing number of US investors plowing money into commodities

FE Team | Published: November 10, 2017 00:05:31

NEW YORK, Nov 9 (Reuters): A growing number of investors are plowing money into commodities, seeking to diversify their holdings on gnawing concerns about a stock market correction as equities scale new highs almost daily.
Low interest rates, solid economic growth across the globe and rising corporate earnings have hoisted the S&P 500 .SPX 16 per cent this year. It reached an all-time high on Tuesday. By contrast the bellwether S&P Goldman Sachs Commodity Index (GSCI) gained 7.0 per cent in that same period.
The last five years presents an even starker divergence. The S&P has gained 82 per cent in that time, while the GSCI has dropped by 34 per cent.
That may start to shift, portfolio managers and investment advisors say. Strong demand in markets like oil and copper, along with tightening supply, is shifting the fundamental outlook, boosting commodity flows. Oil prices recently hit a two-and-a-half-year high, while copper hit a three-year high.
While commodity markets pale in size to equities and fixed income, a notable shift toward the asset class could help validate the concerns of those who believe stocks have become overvalued.
"We've been through a terrible bear market in commodities and equities have been in a tremendous bull market. Both are likely to change," said Roland Morris, portfolio manager and commodity strategist at VanEck Global, an investment manager in New York.
In the past week, a net $324 million has flowed into funds that invest in a broad basket of commodities, Thomson Reuters data shows. In August, flows into commodity mutual funds and exchange traded funds (ETFs) hit $2.1 billion, the highest in more than six years.
However, flows into commodities were patchy in September and October, and the $3.8 billion in net inflows this year through October pales in comparison to $6.5 billion for the same period in 2016.
Commodity prices steadied after sinking to multi-year lows in 2016, but supply gluts in energy and grains markets have prevented heavily traded commodities from keeping up with stocks.
The spread between the indices such as the GSCI, or the Thomson Reuters/CoreCommodity CRB Index .TRJCRB, and the S&P 500 are at or near their widest on record.
Commodities, unlike equities, can be expensive to hold for long periods of time, if future-dated prices are higher than current ones. That has exaggerated the spread between commodities and equities, Morris said, as passive investors in commodities lose money when the managers of commodity indices sell cheaper contracts as they come due for physical delivery, then buy costlier futures.