Lower China growth, commodities unfazed- records near double digit returns

04:03 PM @ Friday - 18 April, 2014

LONDON (Commodity Online): Is China anymore a deciding factor in commodities? Commodities have performed remarkably in 2014 year-to-date despie the worst economic data for many years, according to a weekly review by Barclays.

The 9% Year-to-date return in the DJUBSCI is the strongest start to a year since the 15% gain in early 2008 and commodities have outperformed most other asset classes.

"However, the juxtaposition of a sluggish China and buoyant commodity returns is not a sign that China no longer matters at all. Since 2008 its share of global demand in everything from oil to soybeans has risen rapidly and in the industrial metals markets, which have been the stand-out underperformers in the commodity complex so far this year, China is by far the largest consumer with 40-50% of the market," Barclays said.

The market has adjusted to the lower China growth trajectory, the risk-on-risk-off trading patterns driven by concerns about financial market instability and potential sovereign debt default have eased this has enabled a much more diverse set of drivers to wield their influence in different commodity markets.

Geopolitical concerns, especially the Russia-Ukraine crisis supporting oil prices, bad weather in the US and Brazil pushing up the price of natural gas and many agricultural markets, labour disruptions supporting PGMs markets and an Indonesian export ban raising the price of nickel, have all been important contributors so far this year.

Barclays notes that China concerns have depressed returns on industrial metals in S&PGSCI which is down 6% year to date but short fall in nickel ore exports from Indonesia boosted nickel prices by 34% so far but Copper prices are down 10%.

Therefore, investors need to focus on benefits from an allocation to commodities whose risk profile is markedly different from other mainstream assets. No wonder hedge funds in US commodity markets have 18% of total open interest in long positions, higher than at any point since the financial crisis began.

China is taking stimulus measures to shore the economy and this could provide the much needed push to commodities.

"We expect Q1 to prove the low point for Chinese economic growth this year and for growth momentum to pick up substantially in Q2, as some of the measures start to have an impact," Barclays said.