?Energy is the top commodity from which most institutional investors expect to see the highest returns in 2009, according to nearly 40% of 230 attendees surveyed at Barclays Capital’s fourth annual U.S. Commodities Investor Conference in December 2008.
The investment bank is a division of London-based Barclays Bank Plc that, in November 2008, fully integrated its acquisition of Lehman Brothers’ U.S. fixed-income businesses. The electronic audience-response survey was conducted live during the conference attended by oil, gas, power, metals, agriculture and environmental professionals and institutional investors for banks, endowments, hedge funds, insurance companies and pension funds.
Agriculture came in second with 28% of the vote, followed by industrial metals (16%), precious metals (12%) and livestock. Along with the expected high returns in energy, more than 80% of respondents expected the price of oil to average at or above $75 per barrel during the next five years, while 17% expected prices of between $50 to $75. The remainder expect an average below $50.
“Something that I find very interesting,” says Kevin Norrish, director of commodities research for Barclays Capital, “is that, when we asked people what they expected to happen to prices over the next few years, it’s clear most of the audience believes that prices currently are a long way below the levels that are justified by medium-term fundamentals.
In fact, Barclays Capital’s analysts asked the same question in Europe and China just two weeks prior to the December conference, with similar results. This implies that, worldwide, investors do not believe oil prices are in line with supply and demand.
There is discontinuity between short-term market dynamics driven by concerns about the global economy and credit issues, and the guarantee that, going forward, low prices will ensure that demand grows much faster than supply. Survey responses seem to indicate that investors and analysts believe that, once economic conditions improve, there will be a big recovery in energy commodities and in industrial metals.
When asked about the best method to diversify into alternative energy, some 41% cited alternative-energy stocks, followed by carbon-emissions trading (21%) and direct investment in agriculture and biofuel (6%), while 32% said alternative energy is “not viewed as an investment priority.”
“Despite the volatile markets and falling commodity prices of recent months, institutional investors are committed to increasing the sophistication of their commodity investment strategies,” says Joe Gold, co-head of commodities at Barclays Capital.
This level of sophistication has increased during the past few years, says Michael Zenke, an analyst for Barclays Capital. “We are seeing more tactical investments being placed. Two or three years ago, the large investments were placed in a basket or index basis. We now see a much greater propensity for investors to place transactions in inelastic classes, such as oil.”
Martin Woodhams, head of Barclays Capital’s commodity-structuring division, agrees. “Investors very strongly believe in the strategic benefits of portfolio diversification and the tactical benefits that the volatility in the commodity market provides, which are seen as opportunities for good risk-and-reward trading positions. This asset class continues to grow, even under the market conditions in which we find ourselves.”
About 50% of all respondents indicated that 5% or more of their portfolio is in commodities, while 75% expect to invest above the 5% level during the next three years.
Even with the current global economic focus on deflationary trends, more participating investors than in 2007 (15% versus 5%) indicated that inflation-hedging characteristics are the most attractive aspect of commodities investment. However, the most attractive aspect for many investors is portfolio diversification at 35%, followed by absolute performance (25%), potentially high levels of alpha (24%) and the inflation hedge.
According to the survey, investors’ greatest concern about investing in commodities is the potential slowdown in emerging markets (34%). This macroeconomic factor carried greater weight with investors than other concerns, including price volatility (27%), regulatory changes (20%) and capacity or liquidity concerns (19%).
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