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Sky-high stock market has investors looking to commodities.

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Sky-high stock market has investors looking to commodities

NOVEMBER 9, 2017  Devika Krishna KumarChris Prentice

 

NEW YORK (Reuters) – A growing number of investors are plowing money into commodities, seeking to diversify their holdings on gnawing concerns about a stock market correction as equities scale new highs almost daily.

Low interest rates and rising corporate earnings have hoisted the S&P 500 .SPX 16 percent this year. It reached an all-time high on Tuesday. By contrast the bellwether S&P Goldman Sachs Commodity Index (GSCI) .SPGSCI gained 7 percent in that same period.

The last five years presents an even starker divergence. The S&P has gained 82 percent in that time, while the GSCI has dropped by 34 percent.

That may start to shift, portfolio managers and investment advisors say. Strong demand in markets like oil and copper, along with tightening supply, is shifting the fundamental outlook, boosting commodity flows. Oil prices recently hit a two-and-a-half-year high, while copper hit a three-year high.

While commodity markets pale in size to equities and fixed income, a notable shift toward the asset class could help validate the concerns of those who believe stocks have become overvalued.

“We’ve been through a terrible bear market in commodities and equities have been in a tremendous bull market. Both are likely to change,” said Roland Morris, portfolio manager and commodity strategist at VanEck Global, an investment manager in New York.

In the past week, a net $324 million has flowed into funds that invest in a broad basket of commodities, Thomson Reuters data shows. In August, flows into commodity mutual funds and exchange traded funds (ETFs) hit $2.1 billion, the highest in more than six years.

The spread between the indices such as the GSCI, or the Thomson Reuters/CoreCommodity CRB Index .TRJCRB, and the S&P 500 are at or near their widest on record.

“The returns (from commodities) since mid-summer have been high … oil right now has a positive roll yield for the first time in a few years,” said Greg Sharenow, portfolio manager at PIMCO, who helps manage more than $3 billion in assets.

Historically, such a move has been an indicator of future gains and that has, in part, led to increased interest in commodities, Sharenow said.

Benchmark Brent and U.S. crude fell to the lowest levels in more than a decade in 2016 and have recovered sharply in recent weeks, boosting commodity indices, where oil often carries the greatest weight.

“Brent (crude) has already broken through the psychological barrier of $60 a barrel and if (U.S. crude) can get to $60 as well, it could spur even further investor interest,” said Matt Sallee, portfolio manager at Tortoise Capital Advisors.