Forex Flash: Commodities becoming attractive – Merrill Lynch

As cross-asset correlations have started to normalize, Merrill Lynch analysts believe it is worthwhile noting that the tables are starting to turn for the asset class: “For starters, equity correlations with commodities have declined meaningfully in the last six months and are now back near pre-2008 levels in many cases. Similarly, both High Yield and Emerging Market bond returns are no longer highly correlated to commodities”, they wrote, adding that “as global financial markets have started to normalize, the portfolio diversification benefits of commodities are coming back”.

So, although “Commodities may have underperformed other assets on a risk-adjusted basis in recent years and have suffered from a period of high correlation to betterperforming risk assets such as equities”, the two trends are now changing. Commodities benefit from “a more positive outlook for both roll and spot returns on the back of a cyclical upturn” and, as cross-asset correlations break down, commodities a more attractive portfolio diversification tool. Also, commodities are a good way to hedge against unexpected inflation caused by agressive monetary easing by central banks.