Commodities return to favour – here’s what investors are buying

It’s not just gold that has been shining in the first five months of this year amid trade war talks and political uncertainty.

This year, commodity tracker funds have made a comeback, according to data from WisdomTree. In the first five months of 2018, investors’ money flowed into various commodities – and not just gold.

Flows into broad commodity basket ETPs (exchange traded products) surged by 19 per cent, overtaking both equity and fixed income ETP flows, according to figures by Aneeka Gupta, associate director of research at WisdomTree.

She says: ‘Historically strong inflows into gold ETPs would act as a precursor to inflows into broad commodities, especially during times of uncertainty. ‘However, this year we have witnessed a broad-based recovery across commodities.’

As the name suggests broad commodity basket ETPs invests in a mixture of hard and soft commodities. Among the hard commodities are precious metals, such as gold and silver, while soft commodities include coffee, sugar and soybean. 

Precious metals saw flows of 6 per cent, dominated by gold ETPs, as investors sought a safe haven in the face of trade tariffs threats and political chaos in Italy.

Source: Bloomberg, WisdomTree, data available as of close 31 May 2018.

Meanwhile, agriculture saw 2 per cent inflows.

Within the broad commodity baskets flows into crude oil has posted gains 12 per cent since the start of the year (to 6 June); wheat has jumped 24 per cent, and nickel is up 23 per cent inflows and cotton has risen by 16 per cent.  

Gupta explains that historically commodities have garnered momentum in the face of the Euro crisis or technology bubble.

Agriculture as an asset class has been out of favour for many years, but excessively dry weather – due to climate change and its irregular weather consequences - has boosted prices. They’re seen as a good long-term diversifier because their fortunes are less tied to the economy and more depend on the weather.

However, energy ETPs saw 8 per cent outflows. Gupta says: ‘Energy ETP flows have historically displayed an inverse relationship to their prices, in contrast to most commodities.

‘This year seems to exhibit an extension of that trend, as investors appear to be less convinced of a continuation in the oil price rally.’  

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