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Commodity returns up, correlations down, flows stabilising

London, 17 March 2014

Analysts at Barclays think the tide may at last be starting to turn for commodity investment flows. The three key positives so far this year are: very strong benchmark returns in the year-to-date; the return to negative correlations with other assets, and the consequent re-establishment of commodities as a viable alternative asset; plus the end to a long period of gold liquidation.

In February, total commodity assets under management grew $13bn, the first expansion since August 2013. This was mainly driven by price appreciation, but the $2bn net inflow of new investments, though modest, was notable because it included the first positive monthly net flow into physical gold assets for more than a year, as well as small allocations to commodity beta, the first in many months.

Nevertheless, say Barclays, concerns about the health of the Chinese economy have intensified, which, alongside rapidly growing supply in some markets such as oil and large surpluses in some metals, are keeping investors cautious. So the most likely scenario in the months ahead, in theri opinion, is outflows slowing as better diversification properties and a lower cost of carry reduce the pressure to lower commodity holdings in investors’ portfolios.

"To us, 2014 looks like another alpha year for commodities with few clear directional trends but plenty of short-term trading opportunities in commodities. Consequently, we expect switching out of beta strategies into alpha to continue, as well as small net inflows to commodity alpha strategies, before fresh inflows reach a more consistent level as beta performance picks up later in the recovery cycle."

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