The commodity super-cycle is on track to hit a major speed bump next year — if it hasn't already.
Surpluses across a variety of commodities and a consumption slowdown in China have Edward Morse, global head of commodities research at Citigroup Global Markets Inc., arguing that investors need to change the way they invest in the asset class.
“It is now clear the commodity super-cycle is over. No longer will a pure long-only strategy bring the returns expected in 2002 to 2008, nor will conditions approximating those of the last decade return anytime soon,” Mr. Morse wrote in a research note sent to clients Monday.
He expects surpluses, like the one in U.S. natural gas, to become the norm across most commodities as demand slows along with the global economy.
Even when demand picks up, which Mr. Morse expects by the end of next year, the performance of various commodities is likely to be more differentiated than in the past.
The biggest impact to long-only commodity investing is going to be in China. The country's economic growth will shift from being raw materials intensive, with an emphasis on building out infrastructure, to relying on household consumption, he according to Mr. Morse.
“The overall slowing and the restructuring of the Chinese growth model should mark a watershed in global commodity markets, if only because China had played such an outsized role in global commodity markets in the past decade,” he wrote. “For many industrial metals, China, in fact, was responsible for all of net global demand growth after 1995 and also is one of the largest global consumers of energy, grain, and soft commodities.”
Some investors have already begun dialing back their long-only commodity exposure.
Money managers have cut holdings of net-long commodity positions by 38% since Oct. 2, according to Bloomberg.
On the fund side, more than $1 billion has exited broad-based commodity mutual funds over the past six months, according to Morningstar Inc. Flows were positive in only two of those months, and neither month saw more than $75 million of net new investment.