Commodities Back in Favor With Investors

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Searching for a return and shying away from an already record equities market, investors are getting back into commodities.
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Not all commodities, it has to be said, but squeezed fundamentals and solid global GDP growth are encouraging investors to get back into oil and some metals — like copper and zinc — after several years of poor commodities performance.
The S&P has gained 82% in the last five years, while the S&P Goldman Sachs Commodity Index (GSCI) has dropped by 34% as commodities have been out of favor.
But the fundamentals are changing for many commodities this year, encouraging renewed interest in the sector among fears that equities my soon top out.

Oil prices recently hit a 2 1/2-year high, while copper hit a three-year high. Although inflows of funds have been patchy, with some months good (August at $2.1 billion was a six-year high) and some poor (the year to date is still down on the same period in 2016), most analysts are expecting investor inflows to add to upward pressure on prices next year.
Part of the attraction is returns are so poor elsewhere and share prices have risen to such levels. The S&P 500 is trading at a forward price-to-earnings ratio of 18.3pc, the highest since the dotcom bubble, according to The Telegraph.
As a result, many are expecting a correction. Meanwhile, credit markets are showing sufficient signs of stress, leading to some worry the market could implode.
Yields on the ICE Bank of America Merrill Lynch euro index for junk debt dropped from 6.4% in early 2016 to 2% just before the latest sell-off, The Telegraph reports. This is lower than yields on 10-year U.S. Treasuries, usually regarded as the benchmark safe-haven asset for the world. Central bank buying is largely to blame, with banks holding such huge portfolios of high-grade commercial debt that investors are forced to go down the value curve to find any yield (even poor yield). As the article notes, credit is the canary in the coal mine, and this month’s sell-off held echoes of similar tremors felt in 2006, prior to the collapse of Bear Stearns (and later, Lehman Brothers).
Cheap credit is finally coming to an end. Markets are just waking up to the possibility it could come to an end sooner rather than later.
The European Central Bank has already announced that it will halve bond purchases from €60 billion to €30 billion a month at the start of 2018. This comes in an effort to adjust expectations as growth picks up, commodity prices rise and unemployment falls across Europe — raising the fear at the inflation fixated German treasury that inflation could rise if easy money is perpetuated for too long.
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Rising interest rates will hit the credit markets, equities and commodities. But of the three, commodities are by far the furthest from bubble territory and should prove the more resilient.

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