Why Commodities Are Still Worth Investing In - Expert View

Ainhoa Barcelona

10 May 2013

Mouhammed Choukeir, chief investment officer at UK-based private bank Kleinwort Benson, shares his views on the role of commodities in today’s market. Despite their lacklustre start to the year, commodities still have a role in multi-asset portfolios, even if marginal, he argues.

So far this year, commodity prices are down 5.1 per cent and are in negative momentum. Precious metals such as gold and silver and industrial metals such as aluminium and copper are down 15.7 per cent and 12.3 per cent respectively, while energy prices are up 4.5 per cent.

Despite this recent weak performance, commodities are still playing a role in multi-asset portfolios, although marginal due to the current negative momentum, Choukeir believes.

The benefits of commodities

Although commodities have typically been presented as risky investments, in that they do not generate income, they are difficult to value and investors have to pay to store them which eats away at the potential returns. But Choukeir believes there are also many benefits - once you jump over the hurdles.

First, owning commodities in multi-asset portfolios offers advantageous portfolio diversification. Over the past five years, some commodities have had a low or negative correlation to bonds and equities.

Second, commodity prices have a positive relationship with inflation. Since 1960, high and unexpected inflation has occurred nearly half the time and over those inflationary periods, commodities have performed significantly better than equities and bonds.

Third, commodities continue to benefit from the economic growth in emerging markets. Energy consumption in Asia has been rising at 4 per cent a year on average since 1990, and China has been the largest global energy consumer since 2009. It now accounts for over a fifth of total energy consumption.

Impact on investors

As stated by Choukeir, there’s no denying that investing in commodities is risky. The average swing in prices since 1991 has been 3 per cent per month. During the credit crunch in 2008, commodities also suffered a large peak-to-trough loss of 54 per cent. But while this sounds like a bumpy ride, it is not too dissimilar to that experienced by investing in equities, he stresses.

The number one objective for all investors is therefore preserving purchasing power, irrespective of risk tolerance, says Choukeir. This means that if inflation increases, the value of investment portfolios should also rise in order to preserve purchasing power over the cycle.

As energy prices affect some 25 per cent of the UK inflation basket, higher energy prices lead to higher inflation. Therefore, owning commodities in multi-asset portfolios helps to protect portfolios from unexpected inflation.

As such, Kleinwort Benson would recommend holding a position in this asset class, says Choukeir. Although recent negative momentum in commodities has led the firm to maintain a cautious view on the asset class, it would look to increase its exposure if momentum turned positive.