1. business and industrial
2. metals

FOR PROFESSIONAL CLIENTS ONLY | NOT FOR RETAIL USE OR DISTRIBUTION
MARKET INSIGHTS
Commodities
Portfolio Discussion | UK
2Q | 2015
There is a growing appreciation of the role of commodities as
an alternative asset class that offers diversification benefits to
portfolios. The asset class as been dominated by headlines of
falling energy prices, but there are many different subsets within
commodity markets, each with its own supply and demand
characteristics and connections to the real economy.
MARKET INSIGHTS
Guide to the Markets
UK | 2Q 2015 | As of 31 March 2015
Slower global growth has dampened the outlook for commodities
• Slowing growth prospects for emerging economies as well as in the eurozone have
weakened the expected demand for commodities, lowering prices.
SLIDE COMBO: 13 | 73 | 75
Global Purchasing Managers’ Index (PMI) for manufacturing
Europe
France
44.0 44.4 46.4 48.4 49.7 49.7 49.8 49.1 48.4 47.0 49.3 49.7 52.1 51.2 49.6 48.2 47.8 46.9 48.8 48.5 48.4 47.5 49.2 47.6 48.8
Germany
49.0 48.1 49.4 48.6 50.7 51.8 51.1 51.7 52.7 54.3 56.5 54.8 53.7 54.1 52.3 52.0 52.4 51.4 49.9 51.4 49.5 51.2 50.9 51.1 52.8
Italy
44.5 45.5 47.3 49.1 50.4 51.3 50.8 50.7 51.4 53.3 53.1 52.3 52.4 54.0 53.2 52.6 51.9 49.8 50.7 49.0 49.0 48.4 49.9 51.9 53.3
Spain
44.2 44.7 48.1 50.0 49.8 51.1 50.7 50.9 48.6 50.8 52.2 52.5 52.8 52.7 52.9 54.6 53.9 52.8 52.6 52.6 54.7 53.8 54.7 54.2 54.3
Ireland
48.6 48.0 49.7 50.3 51.0 52.0 52.7 54.9 52.4 53.5 52.8 52.9 55.5 56.1 55.0 55.3 55.4 57.3 55.7 56.6 56.2 56.9 55.1 57.5 56.8
UK
50.0 50.4 51.9 52.5 54.5 58.4 56.9 56.4 57.8 57.3 56.7 56.1 55.4 56.9 56.5 56.7 54.9 52.9 51.4 53.3 53.4 52.8 53.0 54.0 54.4
US
54.6 52.1 52.3 51.9 53.7 53.1 52.8 51.8 54.7 55.0 53.7 57.1 55.5 55.4 56.4 57.3 55.8 57.9 57.5 55.9 54.8 53.9 53.9 55.1 55.7
Japan
50.4 51.1 51.5 52.3 50.7 52.2 52.5 54.2 55.1 55.2 56.6 55.5 53.9 49.4 49.9 51.5 50.5 52.2 51.7 52.4 52.0 52.0 52.2 51.6 50.3
Emerging
Brazil
51.8 50.8 50.4 50.4 48.5 49.4 49.9 50.2 49.7 50.5 50.8 50.4 50.6 49.3 48.8 48.7 49.1 50.2 49.3 49.1 48.7 50.2 50.7 49.6 46.2
Russia
50.8 50.6 50.4 51.7 49.2 49.4 49.4 51.8 49.4 48.8 48.0 48.5 48.3 48.5 48.9 49.1 51.0 51.0 50.4 50.3 51.7 48.9 47.6 49.7 48.1
India
52.0 51.0 50.1 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5 51.3 51.3 51.4 51.5 53.0 52.4 51.0 51.6 53.3 54.5 52.9 51.2 52.1
China
51.6 50.4 49.2 48.2 47.7 50.1 50.2 50.9 50.8 50.5 49.5 48.5 48.0 48.1 49.4 50.7 51.7 50.2 50.2 50.4 50.0 49.6 49.7 50.7 49.6
Korea
52.0 52.6 51.1 49.4 47.2 47.5 49.7 50.2 50.4 50.8 50.9 49.8 50.4 50.2 49.5 48.4 49.3 50.3 48.8 48.7 49.0 49.9 51.1 51.1 49.2
Taiwan
51.2 50.7 47.1 49.5 48.6 50.0 52.0 53.0 53.4 55.2 55.5 54.7 52.7 52.3 52.4 54.0 55.8 56.1 53.3 52.0 51.4 50.0 51.7 52.1 51.0
50
Diversification opportunities
Highest relative to 50 PMI
• Because of their low correlation with traditional asset classes (equities and bonds),
commodities can play an important diversification role within a portfolio.
| 73
GTM – UK
Ten-yr
Ann.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1Q15
Copper
56.1%
Nickel
167.2%
Wheat
52.1%
Gold
2.4%
Copper
129.6%
Silver
81.6%
Gold
9.6%
Corn
18.9%
Crude Oil
6.8%
Coffee
37.7%
Silver
6.1%
Gold
8.0%
Nat. gas
52.8%
Copper
45.1%
Crude Oil
40.1%
Gold
-0.2%
Copper
6.9%
Nickel
54.6%
Coffee
66.8%
Corn
1.1%
Wheat
9.7%
Nat. gas
5.0%
Silver
25.0%
Corn
40.0%
Gold
24.2%
Silver
-26.6%
Silver
47.4%
Nickel
32.0%
Crude Oil
-3.7%
Silver
7.0%
Copper
-8.8%
Gold
-1.8%
Copper
-3.0%
Silver
6.0%
Crude Oil
21.9%
Silver
37.8%
Silver
9.1%
Coffee
-27.3%
Alum inium
33.6%
Corn
30.5%
Silver
-10.2%
Gold
6.0%
Nickel
-20.1%
Alum inium
-3.1%
Alum inium
-4.2%
Nickel
0.4%
Alum inium
15.5%
Wheat
20.0%
Copper
4.1%
Nat. gas
-38.0%
Gold
22.7%
Copper
29.4%
Coffee
-11.2%
Copper
4.9%
Alum inium
-20.8%
Wheat
-9.5%
Corn
-7.2%
Gold
13.8%
Alum inium
19.4%
Corn
-2.3%
Wheat
-39.4%
Coffee
10.1%
Gold
28.5%
Alum inium
-21.7%
Alum inium
-4.1%
Wheat
-27.2%
Corn
-13.3%
Nat. gas
-11.0%
Coffee
-5.8%
Nickel
-8.1%
Gold
16.0%
Coffee
-6.4%
Alum inium
-41.0%
Crude Oil
4.2%
Wheat
21.0%
Copper
-24.5%
Nickel
-10.3%
Gold
-28.7%
Copper
-16.6%
Wheat
-13.2%
Alum inium
-6.1%
Silver
-20.5%
Other assets and
investor behaviour
Corn
-23.1%
Nickel
7.3%
• However, while it may not have felt like it, the global economy has been expanding at an
above-trend pace in the last year and growth is expected to remain above trend in 2015.
• If supply growth is lower than demand growth then deficits will emerge.
Source: Markit, J.P. Morgan Economic Research, J.P. Morgan Asset Management. The Global Purchasing Managers’ Index (PMI) assesses the economic health of
the manufacturing sector by surveying output and employment intentions. For Global PMI, heatmap colours are based on PMI relative to global recent history; for
countries, heatmap colours are based on PMI relative to all countries shown. Global PMI is GDP-weighted calculation. Guide to the Markets - UK.
Data as of 31 March 2015.
Corn
-3.1%
Wheat
-8.8%
Coffee
1.0%
Nickel
-16.9%
Copper
-53.8%
Corn
-10.3%
Alum inium
5.2%
Nickel
-24.7%
Crude Oil
-11.8%
Corn
-30.3%
Crude Oil
-14.9%
Wheat
-8.1%
Coffee
-11.7%
Crude Oil
-16.7%
Alum inium
-18.9%
Crude Oil
-53.9%
Wheat
-26.1%
Crude Oil
3.7%
Wheat
-34.0%
Nat. gas
-30.7%
Coffee
-30.6%
Nat. gas
-30.8%
Nickel
-18.5%
Crude Oil
-9.4%
Corn
-18.4%
Nat. gas
-72.1%
Nat. gas
-22.9%
Nickel
-56.8%
Nat. gas
-51.6%
Nat. gas
-40.7%
Nat. gas
-47.1%
Coffee
-41.6%
Silver
-36.7%
Crude Oil
-41.7%
Coffee
-21.6%
Nat. gas
-34.1%
• Within the broader commodities asset class, there is scope for diversification. Top-level
categories include food, energy, precious metals and non-precious metals. Also, many
sub-categories are in competition with one another or have different demand and
supply drivers.
• For example, in the energy sector, the gas market and the oil market are currently
driven by very different dynamics.
Source: Bloomberg, UBS, FactSet, J.P. Morgan Asset Management. Returns are in base currency of the index. Annualised period covers 2005 to 2014.
Guide to the Markets - UK. Data as of 31 March 2015.
Oil consumption and production
GTM – UK
-3.6
Canada
UK
12
0.9
US
10
1.6
Italy
8
'01
'03
'05
'07
'09
'11
Crude oil prices
'13
YTD change
$ per barrel
150
$
125
Brent Crude
WTI
-3.0%
-10.8%
France
2.4
2.4
Japan
Russia
100
Brazil
75
China
50
3.6
-13.6
0.7
2.4
South Africa
25
0
2.2
Germany
4.8
India
'91
'93
'95
'97
'99
'01
'03
'05
'07
'09
'11
'13
-14
-8
5.3
-6
-4
-2
Source: (Top left) EIA, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Asset Management. (Right) EIA, IMF, J.P. Morgan Asset Management.
Guide to the Markets - UK. Data as of 31 March 2015.
0
2
Geopolitics can be a concern and an opportunity
• Surging global supply of oil, led by the United States, has helped cause a sharp decline
in the price on global markets.
Net imports as % of GDP, 2013
US
Saudi Arabia
Russia
14
6
| 75
Oil importers and exporters
Millions of barrels per day
Other assets and
investor behaviour
Mar
46.8 46.7 48.3 48.8 50.3 51.4 51.1 51.3 51.6 52.7 54.0 53.2 53.0 53.4 52.2 51.8 51.8 50.7 50.3 50.6 50.1 50.6 51.0 51.0 52.2
Oil production by country
75
Feb
51.0 50.1 50.4 50.3 50.6 51.5 51.6 51.9 52.8 52.9 52.9 53.2 52.4 51.9 52.2 52.6 52.4 52.5 52.2 52.2 51.8 51.5 51.7 51.9 51.8
Commodity returns
73
Jan
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
2015
Global
Lowest relative to 50 PMI
13
| 13
GTM – UK
2014
Eurozone
Developed
Global economy
Mar
2013
4
%
6
• Those countries which export more than they consume, such as Russia and Canada,
have been hurt but the decline and have seen their currencies and growth rates adjust
downward.
• Most countries are net importers and therefore benefit from the decline in price of this
key commodity. Overtime, this should support economic growth, profit margins and
consumer spending.
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Investment implications
• Investors remain fixated on global growth but shouldn’t neglect
the supply side of the equation as a catalyst to push prices
higher.
• Commodities continue to provide a good source of
diversification due to low correlations with other asset classes.
• Geopolitics remains a fundamental driver of commodity prices.
As we’ve seen in the past, political tensions in the Middle East
can easily lead to a sharp increase in oil prices.
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