Banks Expanding Commodities Groups
Investment banks are increasingly looking to commodities to offset major losses from the troubled credit markets. In fact, commodity prices are showing the largest sustained gains since the early ’80s. Strong demand, a weak dollar, as well as speculative trading have fuelled the rally. As a result, commodity investment has gone mainstream, according to a recent report in USA Today.
Now, despite well-publicized cutbacks, executive search firm, A.E. Feldman says investment banks are on the hunt for commodity traders and analysts. Commodities groups are also in need of quantitative analysts to develop pricing models.
Investors use commodities as a hedge against inflation and market downturns because they typically have a low or negative correlation with stocks and bonds. Speculators, such as hedge funds and pension funds looking for high returns and greater diversification, are also increasingly attracted to commodities. Focusing on commodities however, does increase exposure to risks. Commodity prices are sensitive to politics, economics, even the weather. But strategy and timing is everything. And banks that get it right can generate huge profits.
Fidelity International and Goldman Sachs may get approval from India’s government this week to retain their entire stakes in commodity exchanges, allowing them to profit from a surge in trading, according to a recent Bloomberg report. India is the world’s largest consumer of gold and the second-biggest producer of wheat, sugar and rice. Bloomberg also reports that D. H. Pai Panandiker, President of the RPG Foundation, an economic policy group based in New Delhi, says, “Commodities trading is going to be the next hot thing in India. With volumes expected to surge substantially, foreign investors clearly see a huge opportunity in that area.”
Barclays Capital is also pursuing plans to recruit more than 1,500 employees next year, despite being forced to write off $2.67 billion in the wake of the credit crunch, according to the WSJ. The WSJ report states that Mr. del Missier, President Barclay’s investment-banking arm, sees big opportunities in commodities and emerging markets, particularly in China.
Meanwhile, Citigroup and Merrill Lynch recently bought 5% stakes in the Multi Commodity Exchange, the independent commodity exchange based in India known as MCX, Bloomberg reports. The firms plan to capitalize on exponential growth in trade on the exchange.
The International Monetary Fund (IMF) reports that the IMF commodities and energy price index rose 21% in the first eight months of 2007. The primary reason for the jump: the resurgence in oil prices.
Oil prices rose to all-time highs in September, thanks to solid growth in demand amid tight supply. According to an AP report, Phil Flynn, an analyst with Alaron Trading says, “It’s a market that can’t be ignored. If you’re going to have a well-rounded, diversified portfolio you can’t pretend like the energy market doesn’t exist.”
The AP also says that Bear Stearns and other firms are playing catch-up to Morgan Stanley and Goldman Sachs, which are the top commodities investors.
Despite some losses, the IMF says metals prices will remain strong as rising production costs limit declines. Although food prices should moderate over the medium term, the IMF also predicts that demand from emerging markets and global demand for biofuels could provide continued support. And barring more changes in OPEC’s output or a major global recession, the IMF says oil prices are likely to remain high due to growing demand from China, the Middle East and the U.S.
A recent AP report concludes that most analysts believe that the world is in the midst of a long-term commodities boom, fueled by demand from fast-growing countries such as China for everything from oil to soybeans. Reuters also reports that carbon emissions trading is expected to grow in 2008, especially as Congress ponders a slew of climate bills proposing a carbon market, which could potentially double carbon trading worldwide.
On the flip side, not everyone agrees that demand fundamentals support the recent surge in commodities. The AP reports that James Cordier, President of Liberty Trading Group, attributes most of the recent rally to speculative trading. He predicts that prices will turn downward when the Fed stops lowering interest rates. Bloomberg also reports that Merrill Lynch predicts the slowdown in the U.S. economy may set off a wider reduction in global growth, curbing demand for commodity exports.
