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Popular Bet in Global Financial Markets—That Prices Would Keep Rising—Is Unraveling
Investors are suffering mounting losses as a decadelong rise in commodity prices unravels amid slowing emerging-markets economies, rising supplies of oil and metals and the eventual end of central-bank stimulus policies that propped up prices for raw materials.
The sharp reversal in the prices of commodities, ranging from gold to copper and aluminum, is undermining one of the most popular bets in global financial markets: that prices would keep rising, fueled by strong growth in China and other developing economies and the relative scarcity of many raw materials.
Institutions and individuals have poured more than $440 billion since 2004 into index funds and exchange-traded funds tracking broad commodity indexes, according to Barclays PLC. BARC.LN +1.22% That dwarfs the net flow of $25 billion into U.S. stock funds over the same period, according to Morningstar.
Commodity prices as a group nearly doubled between 1998 and 2008 as measured by the Dow Jones-UBS UBSN.VX +2.78% Commodity Index, with some index components such as oil and gold rising as much as sevenfold during that time and leading to talk of a commodities “supercycle” among analysts and strategists.
But prices never regained their peak after the 2008 financial crisis, and have been drifting down since mid-2011. The trend has worsened this year, leading investors and analysts to call the end of the supercycle. The index slid 10.5% in the first half of the year, with raw materials dearest to China’s growth—industrial metals such as copper, aluminum and nickel—posting declines of as much as 20%.
Major investors such as John Paulson have acknowledged large losses on gold bets, while mining giants including Rio Tinto Group and Anglo American AAL.LN +0.11% PLC have posted massive write-downs on projects this year as falling demand and prices have slashed projected returns. That has hurt investors who sought exposure to commodity markets through investment in corporate equities.
Investors are heading for the exit. Assets under management in commodity investments are down 21% from their peak last year, now sitting at $349 billion, Barclays said in a note Friday. This year, the slowdown in China and a gradual recovery in the U.S. economy have further damped enthusiasm. The sector is facing its third straight annual decline, according to the Dow Jones-UBS index, and commodity funds are headed for their first net outflow since the crisis.
“I think the supercycle is dead,” said Nic Johnson, a portfolio manager at Pacific Investment Management Co., or Pimco, who oversees about $27 billion in commodity investments across the firm’s funds. Pimco is a unit of Allianz SE ALV.XE +0.30% of Germany.
In addition to China’s slowing growth, other factors are weighing on commodities, including the crash in gold prices as U.S. central bankers signal an eventual end to ultralow interest rates as the domestic economy improves, the rising cost of credit that underpins leverage in commodity markets and more attractive returns in equities markets.
China, the world’s second-largest economy after the U.S., said this month that gross domestic product expanded in the second quarter at a 7.5% annualized clip. That is down from 7.7% in the first quarter and well below the 10% average over the last three decades.
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