Strong Start to 2012, With Investors Re-allocating to Broad Commodity ETCs in the New Year

commodity sector seeing inflows. Precious metals and gold saw the largest inflows followed by broad diversified commodity exposures, industrial metals, agriculture and energy. Improving US growth and employment numbers and continued healthy Asian growth have helped sentiment. However, the likely main driver of the 2012 outlook will be whether European policymakers are able to introduce credible policies to sustainably reduce sovereign risk in the region. Of particular importance is their ability to ring-fence Italy and Spain from further sovereign contagion. In our view, the most effective way to do this would be through a full commitment by the ECB – either directly or indirectly – to provide unlimited liquidity support for those government’s primary debt issues. This would likely attract private investor flows, and if done credibly, would – perhaps counter-intuitively – likely limit the actual funds the ECB needs to commit. In the meantime, commodity ETCperformance and flows will likely remain beholden to perceptionsof the sustainability of the recent improvement in global growthindictors and gyrations in sovereign risk.

Broad agriculture ETCs see renewed interest with $8.9mn of net inflows.

Inflows into the agriculture sector were dominated by ETFS Agriculture (AIGA), which received $7.5mn ahead of the release of the USDA crop reports. Although most agricultural prices declined last week, the grains sector continues to record strong gains on a monthly basis, on ongoing concerns over poor weather conditions affecting crop yields.

European gold inflows highlight European investors’ economic concerns.

European-listed physically-backed gold ETCs received all of the $31mn gold ETC inflows, highlighting European investor concern over the impact of the Eurozone sovereign debt crisis. Precious metals was the only sector where single commodity flows were most prominent, as ongoing economic uncertainty in Europe kept investors focussed on defensive assets. ETFS Physical Platinum (PHPT) was the only other area of interest, receiving $7mn last week.

ETFS Forward Energy (ENEF) receives largest inflows in over 2 years, with inflows of $15mn.

Energy ETCs bucked a 10-week trend of net outflows, with $8mn of net inflows. The jump in diversified energy exposures more than offset divestment of crude oil positions. While investors appear to be diversifying in the energy sector, crude oil still represents a 45% weighting within ENEF. The ongoing sabre rattling by Iranian leaders over the Strait of Hormuz will likely keep energy markets on edge and also limit any demand-driven price declines in the near-term.

Bullish signs from Chinese economy prompts best inflows into ETFS Forward Industrial Metals (FIND) in six months.

FIND received $13mn last week, accounting for over 90% of inflows in the metals complex. Sentiment toward industrial metals was buoyed on the back of evidence that Chinese manufacturing remains robust as China’s manufacturing PMI rebounded above the 50 level, signifying continued expansion.