COMMODITY INDICES
over the past five years. We also observe that the highest correla-
Figure 10: Cumulative Performance in Negative
tions are observed for energy with consumer price inflation and
Bond Months
industrial metals with the S&P 500.
January 1989 – June 2007
A Hedge Against Event Risk
Another way of examining the properties of commodities low or
negative returns with other asset classes is by examining the cumu-
lative returns for bonds, equities and commodities during periods of
either fixed income or equity market distress, which we define as a
month where returns are negative.
Figure 10 considers the performance of equity and commodity
returns in months when fixed income returns are negative between
January 1989 and June 2007. We tracked returns of the DBLCI-OY,
versus returns in more traditional asset classes. We find that like
Source: DB Global Markets Research
equities, commodities offer strong diversification benefits in periods
Figure 11: Cumulative Performance in Negative
where fixed income returns are negative. Indeed in the 85 months
Equity Months
between 1989 and 2007 when fixed income returns were negative,
the DBLCI-OY posted positive returns 59% of the time. January 1989 – June 2007
Figure 11 considers the performance of fixed income and commod-
ity returns in months when equity returns are negative between
January 1989 and June 2007. We find that like bonds, commodities
offer strong diversification benefits in periods where equity returns
are negative. Indeed in the 81 months between 1989 and 2007
when equity returns were negative, the DBLCI-OY posted positive
returns 62% of the time.
A Hedge Against Inflation
Commodities tend to react to economic changes in ways that are
Source: DB Global Markets Research
different to traditional asset classes. Historically commodity returns
have tended to perform well during the periods of high and rising
Figure 12: Correlation of Equity, Bonds &
inflation. This positive correlation with inflation, a larger positive cor-
Commodities to Inflation
Short term return correlations with inflation
relation to changes in the rate of inflation as well as inflation shocks
provide portfolios with a commodity exposure a hedge against infla-
tion. These results are illustrated in Figure 12, from work conducted
by Yale International Centre for Finance
•
Michael Lewis is Global Head of Commodities Research at Deutsche
Bank AG. This is an extract from the Deutsche Bank Guide To
Commodity Indices, published on July 16
th
, 2007.
The opinions or recommendations expressed in this article are those of the author and are
not representative of Deutsche Bank AG as a whole. DB does not accept liability for any
direct, consequential or other loss arising from reliance on this article.
Source: DB Global Markets Research
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