* Commodities outperform equities so far in 2014
* Fuelled by rallies in natural gas, coffee, gold
* Bullish factors in agriculture, energy seen as temporary
By Eric Onstad
LONDON, Feb 26 A new burst of investment in
commodities after a hellish 2013 is expected to fizzle out in
coming months, with investors alert to the fickle nature of
rallies across basic resources such as gold and agriculture.
The 19-commodity Thomson Reuters/Core Commodity Index
has gained 6.6 percent in February, its biggest
monthly increase since October 2011, and up nearly 8 percent
It has outperformed global equities, based on MSCI's all
world index, which has flatlined so far in 2014.
The gain has been fuelled mainly by rallies in natural gas
to five-year highs on a freezing U.S. winter, agriculture due to
drought and gold on safe-haven buying following a capital flight
from emerging markets and concern about global growth.
"We are slightly overweight (in commodities), and one of the
reasons is these weather patterns," said Koen Straetmans, senior
strategist at ING Investment Management in the Netherlands,
managing some $240 billion of assets worldwide.
"There are a lot of specifics that have led to this relative
good performance of the complex, but they might fade."
Straetmans has a small position in commodities but holds a
larger overweight position in equities.
While last year saw record outflows of commodity investment,
so far in 2014 about $1.6 billion has entered the sector,
Investors had fled commodities in recent years, with demand
hit by the global economic crisis and slowing growth in the
world's biggest consumer of raw materials, China.
"While this is hardly a strong V-shaped recovery given $50
billion in product net outflows for 2013, data are continuing to
affirm our view that tepid 2014 investor flows would not be
nearly as dire as last year," Citi analyst Aakash Doshi said in
Much of the current investment flows are short-term bets by
hedge funds or computer-driven funds based on momentum and
technical indicators that could quickly reverse.
Long-term investors remain wary of the sector due to a
still-fragile global economy and plentiful supplies of many
"You have momentum from systematic managers ... but it's not
a strong move by investors into the commodity asset class. They
are still reluctant," said Gabriel Garcin, a portfolio manager
at Europanel Research & Alternative Asset Management in Paris,
which invests in European hedge funds and Commodity Trading
Advisors, also known as managed futures funds.
Graphic of commodities performance in 2014: link.reuters.com/reb25t
Graphic of asset performance in 2014: link.reuters.com/dub25t
The heaviest investment outflows last year were from gold
exchange-traded funds (ETFs) as the price shed 28
percent, its biggest annual decline in 32 years.
Gold has bounced back so far this year, rising to its
highest in four months on Wednesday, due to worries about
economic conditions in the United States and China.
Turmoil in emerging markets (EM) could keep supporting gold
in the short term, but once that abates, the metal might be
vulnerable, Straetmans said.
"With global economic growth still being constructive and if
EM stress can be contained, I would see it more on the negative
side from here," he said.
There is also potential for weakness in the energy complex,
said Ole Hansen, head of commodity strategy at Saxo Bank, adding
that commodities were unlikely to keep outperforming other asset
"What categorises some of these positive drivers is the
temporary impact they represent, especially the energy sector
where warmer weather and the U.S. refinery maintenance season
are just around the corner," he said.
He said most of the bullish price impact in natural gas has
been in the front month March, with April trading below.
Agriculture could also be exposed to reversals. A blistering
rally in coffee spurred by drought in Brazil saw arabica
soar 50 percent in the past month to 16-1/2-month peaks.
"Some of the (agricultural) commodity rallies have gone too
far in our opinion, relative to actual supply/demand
fundamentals. We still think a bearish trend will ensue over the
balance of the quarter," Macquarie analyst Kona Haque said in a
"Ample production and replenished stocks will likely remain
key bearish drivers for the agricultural and soft commodities."
(Editing by Veronica Brown and Dale Hudson)