The extraordinary spike in commodity prices is being felt in financial markets as well as in the real economy. Equity markets are down but the widely followed CRB index is up by 36 per cent for the year. Most of the top selling mutual funds have been direct plays on commodity prices or have had a significant commodity angle. Many of the best performing hedge funds are a type known as commodity trading advisers. Their managers have traditionally been very active in commodity markets and often follow a trend once it is established. They have not been slow to get on board the uptrend in commodities. These investment flows have almost certainly helped to keep commodity markets hot. So what next?
Commodity prices are losing some of their momentum. That is troubling since markets often see a bout of speculation in the first four months of the year followed by a period of retracement in early summer. Speculative activity this year has been in commodity markets. The risk is that they will follow the traditional pattern and struggle in early summer. It may be a different story in the longer term. The rise in commodity prices is part of a bigger trend where large pools of capital are making significant allocations to commodities as part of a new approach to managing assets. These highly diversified investment strategies have been pioneered by the likes of the Harvard and Yale endowment funds and are proving increasingly popular with the biggest institutional funds.
Summer brings the possibility of some interesting developments. Will the end of the Olympic Games herald any change in Chinese economic policy? Its economy has been growing at breakneck pace and inflationary pressures have been building. The authorities may be happy to let the pace slip after the games. That would have implications for Western stockmarkets. The commodity dynamic has separated winners from losers. If Chinese economic growth slows, some managers who have struggled so far this year could come back strongly. There is no doubt that returns from active management could be high this year. This is no time for trackers.
Bill McQuaker is director of multi-manager funds at Henderson Global Investors