Research published by Clerical Medical Assetwatch confirmed that commodities were the best-performing asset class in 2007, showing a 20.6 per cent average rise. Soyabeans were the strongest-performing commodity over the year, with a price increase of 77.5 per cent, while precious metals also performed strongly with an overall increase in prices of 26.4 per cent, led by platinum (up 37.2 per cent).

Rising to the top
Martin Ellis, chief economist at HBOS, comments, ‘Last year was the first time that commodities topped the asset class rankings since 2000. A key reason was strong food prices rises, with soyabeans up nearly 78 per cent. This is largely because US farmers are instead growing biofuel crops. Wheat prices have also been very strong on the back of drought in Australia, which has severely interrupted supplies.’

He adds, ‘We expect that the next leg-up in the commodity cycle will be driven by agricultural commodities. Despite a very strong 2007, agricultural commodities have still lagged other commodities over the past ten years. Demand for alternative fuels, such as ethanol, and an emerging Chinese middle class developing Western tastes, is driving demand for grains. Global inventories are at the lowest levels for 20 years and demand is growing rapidly.’

Mark Mathias, CEO of Dawnay Day Quantum, says, ‘We expect the attractions of commodity exposure to become apparent across institutional and private investor markets during 2008. In the energy sector, a downward revision in US proved reserves of oil and a Department of Energy announcement that discoveries in 2006 were about 50 per cent of the ten-year average confirmed all our concerns about the long-term importance of strategic energy reserves.’

Mathias feels, ‘The fundamentals are strong for energy prices. Weak sentiment due to worries over global growth presents a buying opportunity. The long end of the oil curve displays much lower volatility and suggests that the general view of long-term supply is of continued tightness. We remain buyers of the long end of the curve, which looks cheap relative to spot, given our view of fundamentals.’

Turning his attention to industrial metals, which have been the weakest parts of the commodity universe over recent months, Mathias argues, ‘We expect short-term prices to remain vulnerable to recessionary fears. We are likely to see weakness in zinc and nickel, although aluminium will be supported by power shortages in China. And we continue to like the long-term fundamentals for copper, lead and aluminium in particular.’

Record prices
With regards to precious metals, ‘The outlook is positive. Gold could challenge US$1,000 an ounce, while platinum has room to correct as the smelter situation normalises. Agricultural commodities continued to perform well through the quarter, with wheat remaining a feature of the markets. Poor harvests have exacerbated low stock and inventory positions to see wheat reach new highs.’

He concludes, ‘The market has started to look beyond the increased 2007 corn acreage, with strong Chinese demand. In December, the Chinese government announced that it would sell corn from the State Reserves. Cotton has the same dynamics as soyabeans, as acreage will come under pressure of competition from foodstuffs, while the demand dynamics remain solid. In general, our outlook for softs is positive, with leadership rotating between the various crops.’