AppId is over the quota
AppId is over the quota
By Claire Milhench
LONDON | Thu Oct 27, 2011 2:24pm BST
LONDON (Reuters) - Senior fund managers remain optimistic about the prospects for Chinese commodity demand and the outlook for crude oil, but investor fervour for commodities is now more tempered compared with the zeal of recent years.
Doubts about the strength of China's growth prospects have led to weakened investor appetite for commodities over the last quarter amid heightened price volatility, but market watchers expect China to loosen its tight liquidity policy by year-end.
Speaking at the World Commodities Week conference in London on Wednesday, Seth Kleinman, head of energy strategy at Citi, said Citi's base case assumption was China would avoid a "hard landing", favouring a "muddle through" scenario instead.
With investors bailing out of commodities in September he said value was already emerging in certain industrial metals.
"The commodity bull run will resume, it is just on pause for the immediate future," he told conference delegates.
However, markets remain jittery. Iron ore sold off heavily after Chinese steel mills stopped buying and cut production.
The poor steel numbers have increased fears of a hard landing in China, and Kamal Naqvi, global head of institutional sales at Credit Suisse, noted that delegates to the conference were not "religiously bullish" about commodities and China this year.
But fund managers such as Colin O'Shea, head of commodities at Hermes, remain relatively upbeat about the prospects for growth and China's appetite for key commodities such as oil and base metals.
"It comes down to the level of stocks they hold," he argued, speaking to Reuters on the sidelines of the conference on Wednesday. "Globally stocks are pretty low and the Chinese want to manage growth - they don't want a hard landing."
O'Shea said that Hermes saw signs of potential loosening ahead, despite concerns this year about food price inflation.
"They will want to try to keep growth going - I don't think we will have a Chinese crash next year."
Another senior commodities manager with a major hedge fund who did not want to be named said that China was an area of potential concern, but for the moment he remained sanguine.
"There may be a slowdown over the next six to 12 months," he said. "They can't keep building the way they have, but there is still a lot of infrastructure to construct."
He said he had been quite bearish on metals going into the third quarter but is now more positive following the September sell off. He favours the platinum group metals, as platinum is now trading below gold, and he expects an uptick in car sales.
Further out he was more cautious about Chinese demand. "Two to three years down the road there is the possibility of a correction," he said.
INVESTOR FLOWS
Investor enthusiasm for commodities has waned this year due to heightened volatility. Barclays Capital reported that the third quarter ended with $393 billion in commodity investments, down from $408 billion at the end of the second quarter.
September saw the largest decline in key commodity indexes the S&P GSCI and the DJ-UBS since May 2010 and October 2008 respectively, BarCap noted.
"All in all, the recent outflow along with recent aggressive selling of commodities by hedge funds suggests commodity investors are expecting the worst," said BarCap.
But some managers detected signs of investor interest returning in certain segments.
JB Germain, head of EMEA commodity solutions at Citi, told Reuters his pension fund and asset management clients had reduced their notional overall exposure to commodities, but over the last month they have begun to come back to the market.
In particular, they have been seeking exposure to crude oil. "They are worried about the upside risk," he said.
Hermes' O'Shea pointed to the persistent tightness in crude, saying that overall he remained pretty constructive on the sector. "We are still in a supply-constrained world."
Another hedge fund manager said he was becoming more positive on crude oil again after a period of bearishness, but is holding back until the markets enter a more settled risk-on phase, and investor flows return.
"I like the fundamentals but it is too early - we won't see much going into commodities. Until then it will remain volatile - plus the price is still fairly high," he noted.
Other veteran fund managers were also conservative in their assessment of investor flows into commodities over the next 12 months. "I think flows will be modest in or out of the space," said Bob Greer, real return product manager at PIMCO.
"There will be a little inflow, a little outflow, but nothing major either way."
(Reporting by Claire Milhench; Editing by Alison Birrane)
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