Given the debate — and doubts — assailing the commodities sector, it could be a very good — or very bad – move by Calstrs (the Californian State Teachers Retirement System), the second-biggest US pension fund, to be launching its first big push into commodities investing.
As the FT reports on Tuesday, Calstrs is set to vote later this week on a “long-term strategic allocation to commodities”, adding bulk goods such as oil, sugar and copper to its $138.5bn portfolio of equities, bonds, real estate and private equity.
The fund’s rationale — like so many other commodities bulls these days — is to “hedge against the risk of rising inflation”.
But given the uncertainty dogging just about every market and asset class right now, opinions are at best mixed on prospects for commods plays and whether they might provide a solid hedge against inflation.
The perennially bearish Marc Faber in his latest GloomDoomBoom client newsletter sees some prospects for a commodities as well as equities bounce — more, anyway, than for US Treasuries. As he notes:
Given the overbought condition of the US dollar I could envision the following scenario. Temporary, the USD declines (Euro recovers). Equity markets and commodities rebound. Also, in last month’s commentary I suggested that a contrarian investor should buy US Treasury bonds. But, if the USD begins to weaken and if equity markets recover somewhat, I would expect US Treasury bonds to decline once again. I do not like TBT as an investment. For this “short Treasury bond ETF” the roll-over costs are too high. Still, TBT is now in a position to rebound in the short-term.
Ultimately, Faber is still big on gold. Use any stock market rebounds as an opportunity to reduce positions, he advises, “in all markets except for precious metals”.
Overall, though, global commodities trends of the past few weeks don’t augur that well for retiring Californian teachers.
Here, for example, is a headline from Bloomberg on Tuesday:
“Commodities’ biggest drop since Lehman bear signal”. The article continues:
The biggest slump in commodities since Lehman Brothers Holdings Inc collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.
The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth.
Lex, meanwhile, recently asked: “Why are commodity prices in a swoon?”, particularly in light of rises in US, European and UK industrial production, and the increase in steel production to a record 470m tonnes in the first four months of the year.
Its answer:
The dollar’s resurgence, negating the need to hedge with commodities, is one explanation. But jitters over Europe and China give deeper pause for thought. If sovereign debt fears strangle growth, Europe may not need the 15.1m barrels of oil a day the International Energy Agency estimates it will consume this year. China, driver of growth, is forecast to increase consumption a further 7-8 per cent this year to 9.2m b/d. But increasingly aggressive monetary tightening could put paid to that, as Beijing endeavours to damp down an orgy of lending and infrastructure spending.
Commodity market bulls, however, “would argue that commodity prices are doing their usual trick of over-egging market direction” — and indeed, notes Lex, “some, such as copper, are already starting to reverse course”.
But that owes much to technicalities, as China tends to provide support by turning buyer when prices hit a certain level. Ultimately, Lex concludes, it would be a mistake to write off the past few weeks of weakening commodities prices “as a blip”.
Perhaps John Kinsey, of Caldwell Investment Management in Toronto, summed it up when he told Bloomberg:
“It’s the uncertainty that’s the biggest problem.. Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.”
Uncertainty, however, is what commodities investors and forecasters should embrace with open arms, according to commodities commentator and Reuters columnist John Kemp.
Tell that to Calstrs.
Related links:
Is it really a commodities crash? – FT Alphaville
China’s commodities/property price nexus - FT Alphaville
Companies rush to hedge materials - FT