The Truth about Commodity Boom and Busts | Chief Investment Officer

(March 13, 2013) — Commodity investors may have dramatically underestimated the length of cycles that commodity prices experience, a paper by a leading academic has claimed.

In a paper entitled “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run,” David S Jacks looks into the cycles the asset class have undergone in the past 160 years.

He found that the real value of 30 commodities studied – which represented $7.89 trillion in production in 2011 – had, by the end of 2011, rapidly increased since 1900.

“Real commodity prices have collectively been on the rise-albeit sometimes quite modestly-from at least 1950 across all weighting schemes,” Jacks said. “This suggests that much of the conventional wisdom on long-run trends in real commodity prices may be unduly “pessimistic” about their prospects for future appreciation or unduly swayed by events either in the very distant or very recent past.”

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Jacks found evidence of “commodity price super-cycles”, which entailed decades-long positive deviations, which were usually longer than the medium-term view held by many investors. He found that half of the 30 commodities studied were in the midst of one of these super-cycles evidencing above trend real prices starting from 1994-1999.

He said these super-cycles were punctuated by booms and busts, which are “historically pervasive and becoming more exacerbated over time”.

There was a warning for commodity investors, too: “The common origin of these commodity price super-cycles in the late 1990s underlines an important theme of this paper: namely that much of the recent appreciation of real commodity prices simply represents a recovery from their multi-year-and in some instances, multi-decade-nadir around the year 2000. At the same time, the accumulated historical evidence on super-cycles suggests that the current super-cycles are likely at their peak and, thus, nearing the beginning of the end of above-trend real commodity prices in the affected categories.”

Jacks concluded that commodity prices exhibited little trend currently, but the small element of trend shown by the asset class was in a downwards direction. He added that commodity markets are likely set to experience more volatility, which would affect the growth prospects of nations.

To read the paper, click here.

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(March 13, 2013) — Investments in the United States have made up a fifth of all sovereign wealth fund (SWF) capital placements since 2005, research has shown.

TheCityUK, an organisation for financial businesses in the United Kingdom, found the US had been the favoured home for investment capital over the past seven years. The UK accounted for one sixth of these investors’ capital, with China, France, Switzerland, Germany, and Qatar other important destinations.

As an example, in February, the manager of the world’s largest sovereign wealth fund, the Norway Pension Fund-Global announced a $1.2 billion agreement with TIAA-CREF to create a joint US real estate venture.

Emerging market countries have accounted for a growing share of investments over the past two years, the TheCityUK report said, adding that the trend was likely to continue.

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Altogether, SWF assets reached an estimated $5.2 trillion at the end of last year, the report said, marking an increase of 8%. This total is estimated due to the opaque nature of some of the investment organisations, which are reluctant to reveal details of their assets and strategies.

The report predicted this total asset pool will rise to $5.6 trillion by the end of 2013.

There is a further $7.7 trillion held in other sovereign investment vehicles, such as pension reserve funds and development funds, but again this is an estimated total for the same reasons highlighted above.

Along with investment returns and contributions made to the funds by governments and local sovereign organisations, the increase in the assets held in this sector is partly due to new SWFs being created to manage national balance sheet surpluses.

Several African nations have announced they are launching SWFs in order to invest the income from their country’s natural resources for their citizens’ future, while other countries are banking currencies surpluses.

“A number of new SWFs were launched during 2012,” the report said. “This included the Angolan Fundo Soberano de Angola, established in October 2012 to help to manage revenue generated from the sale of crude oil. The purpose of the fund is to facilitate Angola’s social and economic development. Other funds launched in 2012 include Australia’s Western Australian Future Fund and Panama’s Fondo de Ahorro de Panama.”

TheCityUK said countries that are planning to establish new SWFs included Bolivia, Canada, India, Japan, Taiwan, and Thailand.