Although 2014 looks like being a difficult year for commodities, Scott Wolle, chief investment officer for the Invesco Global Asset Allocation team, says that the outlook for commodities could improve sooner than many expect.
Wolle said that the excess return provided by commodities over cash is highly correlated to domestic GDP growth, so that when global GDP accelerates, commodities tend to do well, particularly cyclical commodities like oil and copper. He added that the commodity bear market started in 2008 and prices are now just over half their peak in 2008. “This is nearly the worst experience for commodities in modern history. That’s not to say that prices can’t get worse from here, but to assume that the next few years will continue to be poor for commodities is pushing against market history.”
Wolle said that commodities could act as an inflation hedge if, for instance, the US Federal Reserve withdraws quantitative easing too slowly, creating inflationary pressures. He commented: “Due to the experiences of the past, combined with the uncertainties of the future, we maintain a constructive view of commodities and the role that they can play in our portfolios.”