Commodities regain diversifier tag
While equity indices in emerging markets have fallen, commodity prices have been relatively stable
Since September 2008, commodities and equities have been showing a strong positive correlation, but that may no longer be the case, says a report by Barclays Research titled ‘Untangling commodity correlations’. Commodities may well get back the tag of being an asset class that equity investors can diversify into.
While equity indices in emerging markets have fallen, commodity prices have been relatively stable. The effects of the tapering of quantitative easing in the US and negative news from emerging markets have not affected this asset class the way equities have been affected.
The positive correlation between commodities and equities has continued to trend lower and has recently even entered negative territory. The influence of macro drivers such as economic data, liquidity and monetary policy on commodity prices, too, has lessened. Commodity prices are also behaving less homogeneously, with individual commodity prices likely to be more influenced by sector-specific issues rather than be carried along by a broad trend.
Though it may be premature to say that the positive correlation between commodities and equities has ended, the trend appears to suggest that commodities may still be able to provide diversification to investors, says the Barclays report. It remains to be seen, though, whether the negative correlation is just a blip and equities and commodities will start moving in lockstep once again.
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