Time for commodities to outperform equities: Jodie Gunzberg

Interview with Global head of commodities, S&P Dow Jones Indices

FY15 has seen most commodities fall significantly. However, Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, thinks the new financial year will bring good news for commodities. She tells Rajesh Bhayani that the rising interest rate scenario could be a good sign for commodities. Excerpts:

Most commodities have fallen in FY15. Do you see a repeat of the trend in FY16, too?

21 of 24 commodities lost in FY15 with the flagship indices, S&P GSCI and Dow Jones Commodity Index (DJCI), losing 39.5 per cent and 25.9 per cent, respectively. In the past quarter, six commodities are positive: silver, cotton, gasoil, unleaded gasoline, gold, and feeder cattle. In the past month, one-third of commodities are in backwardation, measuring shortages that could be supportive for silver, copper, live cattle, feeder cattle, Kansas wheat, unleaded gasoline, heating oil and gasoil. This highlights the positive impact of falling oil prices on the petroleum commodities that use crude oil as an input. Each commodity has its own supply and demand model so is impacted by different factors from weather to geopolitical risk. Rising interest rates, Chinese demand from stockpiling, and the possibility of rising oil prices may support commodities this year.

When do you see the US Fed increasing rates and how will that impact commodities prices?

Federal Reserve chairwoman Janet Yellen has said she expects the conditions may warrant an increase in the federal funds rate target sometime this year. Generally, rising interest rates are positive for commodities for three reasons. First, the collateral return increases that raises the total return. Second, carrying costs rise that increase futures prices. Third, as interest rates rise, it may indicate a switch to the mid-cycle which is when commodities outperform equities. It may be time for this given equities have outperformed commodities for seven straight years, the longest streak since the 1980’s.

Which are the key factors / events that should be watched to understand trends in various commodities prices?

Interest rates, strength of the dollar, eurozone debt, Chinese demand and geopolitical tensions are the key factors influencing commodities today. Rising interest rates are generally positive though a strong dollar could be a headwind. However, the strength of the dollar does not drive all commodities down equally since many commodities are more closely related to other forces like the weather or an oil shock. Oil spikes historically benefit all commodities though there may be winners and losers based on whether the commodities are mainly produced or consumed by oil importers or exporters. Agriculture and livestock are different from other commodities since they can be grown. In the short term, their prices are determined by supply shocks from the weather but if the transition from fixed capital accumulation to a consumption-based economy and suburbanisation is successful in China, we might see an increase in demand for goods ‘to be grown’ and an inflection in the long-run trend.

How do you see a commodity indices market developing in India, especially when possibilities have evolved for futures trading in commodity indices?

Commodity index development fills an important need in many emerging areas of the world. Progress has been made in some Asian and South American markets, so we are hopeful to work with Indian markets. There needs to be a balance of liquidity and transparency in order for the indices to open in these markets.

S&P Dow Jones Indices has an index tie-up with BSE for equity indices? Do you plan to expand that covering more new products (within commodities)? Do you propose to develop indices for any of Indian commodity exchange?

We are hopeful that the required liquidity and transparency will be available in order to develop indices with the Indian commodity exchange.