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After worst year ever, commodities may lag recovery

“Confidence in the commodity market… would start to be restored when we start to see a rebound in equity markets again.”

– Mark Pervan, Australia and New Zealand Bank Research

Commodities, until six months ago the darling of investors and an outperforming asset class, sealed their worst year on record with accelerating losses in the fourth quarter of the year, data showed Jan. 1.

Industrial metals, crude oil and even grains took it on the chin as the world fell into recession and investors sold anything liquid or risky to cover deepening losses elsewhere or sock away cash for a brighter day, wiping out six years of nearly unbroken gains in the space of months.

Commodities led the charge lower over the second half of the year with more than 50 per cent plunge since July, double the decline in the U. S. Dow Jones stock index, and some analysts say they will probably lag a recovery that is now expected to materialize only in the second half of next year.

“At the moment, confidence in the commodity market is short, definitely short. That confidence would start to be restored when we start to see a rebound in equity markets again,” said Mark Pervan, head of Australia and New Zealand Bank Research.

“There are a lot of nervous investors, who in some cases probably are not prepared to wade back in until they see more signs of things recovering.”

The five commodity indexes used most heavily by investors to gain exposure to raw material prices – tracking energy, metals and agriculture markets – showed an average 40.5 per cent dive in the fourth quarter, taking the full-year fall to 42.35 per cent.

Indices collapsed by more than two-thirds from their record highs in early July, suffering a 25 per cent average loss in the third quarter – the first negative performance for commodities after four straight positive quarters that had handed investors some of their best returns in 35 years.

With key equity indexes also posting their biggest quarterly drop ever – the Dow Jones suffered a 34 per cent fall, its third worst ever – investors are now banking on a major economic stimulus package from U. S. president-elect Barack Obama to minimize the severity of a global economic downturn.

“For the first quarter, I feel that commodity prices will stabilize as we prepare for a number of changes,” said Adrian Koh, analyst at Phillip Futures in Singapore.

“Crude oil is becoming increasingly cheap as compared to other commodities and in the longterm, it should move higher. However, it’s still on a sharp downtrend.”

Obama has said signing an economic stimulus package will be his priority when he takes office Jan. 20, while one of his top economic advisers said financial policy should address both immediate job creation and longer-term investment needs.

The broad-based Reuters-Jefferies CRB index of 19 mostly U. S.-traded commodity markets including oil, coffee, gold, corn and copper shed one-third of its value in the fourth quarter, its worst quarterly showing ever. At its early July peak, the CRB had surged 250 per cent since the start of 2002; by year end, it was up only 20 per cent.

Alternatives

Still considered an alternative to mainstream investments, commodities’ losses were mild compared to the trillions of dollars sucked out of stocks, but no less unpleasant.

Inst i tut ional funds who shunned commodities until earlier this decade flooded into the sector since 2003, increasing investment twentyfold to a peak above US$200 billion by the middle of this year, a shift often blamed for the rally in prices.

Those funds fell sharply as prices collapsed – by the fourth quarter, commodity assets under management had fallen by about a third to US$144 billion, according to Barclays Capital estimates.

But it also said only a small portion of that drop was caused by active withdrawals, suggesting most of the pension funds and investors are sticking with the sector, for now.

Among the commodity markets, oil and copper stood out as the biggest major losers, both falling by just over 50 per cent on the year. The biggest winner by a stretch was London cocoa, which surged 66 per cent.

Gold, which rallied to a record high above US$1,000 an ounce in March before slipping to around US$880, fared better than most to squeeze out a more than five per cent rise in 2008.

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