Few listed structured products offer diversified exposure to commodities, while this sector is regaining color.
It is not easy to access all the raw materials via a structured product listed on SIX Structured Products. Among the 36 underlying assets used to monitor this sector, at least thirty are indices covering a specific raw material (sugar, oil, livestock or gas, etc.). In addition, most products consist of tracker or exchange-traded commodities (ETC) certificates. No optimization product based on a representative basket of all raw materials, while leverage products mainly concern energy materials.
“Most structured products, and particularly long-term products or perpetual exchange-traded note (ETNs), tend to use indices as underlyings, to the extent that this exempts their promoters or issuers from having to provide an explicit methodology for rolling over the futures exposures of the underlying portfolio,” explains Dr. David-Michael Lincke, Head of Asset & Portfolio Management at Picard Angst, contacted by Allnews. “So even structures stipulating the replication of a sub-sector or an individual raw material will always refer to an index,” continues the expert from Picard Angst, buy-side member of the Swiss Products Association Structured.
“Its particularity consists of applying a daily mechanism for rolling over a portion of future contracts”
One of the most representative trackers in the sector and listed on the SIX is the CDJCMU certificate (ISIN CH0328369423) issued in December 2016 by UBS. It replicates the intelligent maturity rolling index, the UBS Bloomberg BCOM Constant Maturity Commodity CHF Monthly Index (UBS CM-BCOM). Its particularity is to apply a daily rolling mechanism on only a portion of the futures, in order to minimize the costs associated with the one-off rolling of traditional indices. The strategy also consists of taking a position on the most liquid portion of the term structure of the contracts, in order to avoid too high a concentration of short maturities.
The other originality of this dynamic index is that it contrasts quite sharply with two other major commodity indices, namely the S&P GSCI Commodity Index and the Bloomberg Commodity Index, which both offer a limited weight to agricultural commodities in favor of energy. That is, a respective weight of 4% and 7% compared to 30% for the UBS CM-BCOM constant maturity index. Precious metals, for their part, show a significant weight of nearly 20%. This also explains the overall increase of more than 5% over the last six months of the UBS-BCOM index, a performance largely driven by precious metals.
One of the questions the investor faces is determining which segments of the commodities sector would make sense to overweight relative to another. And when. Coffee, natural gas, orange juice? Or is it preferable to have balanced or equally weighted exposure to each of the sector’s constituents? What seems certain is that the themes will be numerous. Both within energy, precious metals and industrial metals.
“The extensive stimulus measures aimed at China’s ailing real estate sector have improved the economic outlook for the Chinese economy and led to a significant improvement in the mood on the industrial metals markets,” emphasizes David-Michael Lincke. Within precious metals, he adds that the main determining factors in the price of gold have “fundamentally changed” in recent years.
“Strategic supplies will drive up metal- and energy-intensive defense spending”
“Institutional demand is now dominated by central banks, particularly those in emerging markets, and private demand has permanently shifted to Asia, where gold has established itself as the preferred form of safe investment, especially among Chinese households, due to the lack of alternatives since. the slowdown in the real estate market,” explains David-Michael Lincke. According to which a certain number of structural factors are likely to favor the current cyclical recovery of the commodity markets in the years to come.
Like, for example, the lack of capital investment over the last decade, which limits production capacity. But also the energy transition driven by climate change, which increases the need for base metals. As well as increasing tensions and geopolitical risks, which give rise to increased construction of strategic supplies. “Strategic supplies that increase metal- and energy-intensive defense spending,” says David-Michael.
“Finally, current developments in the field of artificial intelligence also have a positive influence, as they are accompanied by extremely increased energy demand, which will require accelerated expansion of electricity networks to meet them,” concludes the expert based in Pfäffikon.
