For media distrib
bution. March
h 2014
Schro
oders
s
Multi-As
sset In
nsights
By Alastair Baker
B
and Patrick B
Brenner, Fu
und Managers, Multti-Asset
Extreme weather driving
g commodiities
Com
mmodities, ass measured by the DJUB
BS Commodities Index, have returnedd 8.3% year to
date
e to 6 March.. This strong performance
e was driven
n by one facto
or: weather. Whilst weath
her
has the potential to have a negative impa
act on agricu
ulture prices, 2014 has seeen extreme
wea
ather put upw
ward pressure
e on prices. T
The weatherr shock came
e in two partss. First was the
t
seve
ere weather experienced in the US. D
Demand for natural
n
gas ro
ocketed as itt is the prima
ary
sourrce of energyy used to hea
at homes in tthe US. Inve
entories of na
atural gas weere drawn do
own
to ve
ery low levels, while the volatility
v
of n atural gas prrices jumped
d. The worst of the volatility
was in late January when it became
b
clea
ar that the cold weather would
w
persist for longer th
han
expe
ected. As this extremely cold weathe r is a temporrary factor an
nd natural gaas remains well
w
supp
plied in the US,
U we see no
n reason to change our energy view at present aand maintain our
overrall negative score.
The second com
mponent of th
he weather s hock came from
f
South America.
A
Thiss key coffee
grow
hot, dry wea
wing region experienced
e
ather, while th
here was hea
avy rain the in the soy be
ean
grow
wing regions. This has ca
aused agricu lture prices, as measured
d by the DJ U
UBS Agricultture
Inde
ex, to rise by over 16% since the startt of the year (Figure 1). The
T main drivver of this mo
ove
has been coffee, which has rallied
r
73.9%
% year to date
e and accounts for 42% oof the overalll
agricculture indexx’s return.
Figu
ure 1: DJ UB
BS Agricultu
ure Index, 31
1 Decemberr 2013 to 6 March
M
2014
120
115
110
105
100
95
31-Dec
08
8-Jan
16-J
Jan
24-Ja
an
01-Feb
09-Feb
17-Feb
225-Feb
05--Mar
Sourcce: Schroders, Bloomberg, March 2014
Agriculture price
es are prone to weather d
disruptions and one of the
e key indicattors used to
pred
dict whether we
w are likely
y to experiencce adverse weather
w
is the El Niño Inddicator. An El
E
Niño
o is when the
e indicator identifies a tem
mperature ch
hange greate
er than 0.5°C
C above averrage,
and a La Niña iss a change off greater tha n 0.5°C belo
ow average. Historical
H
daata going bac
ck 50
yearrs suggests that
t
weather disruptions are much mo
ore likely to occur
o
when tthe indicator
poin
nts to either of
o these extre
emes. There
efore, the cha
ance of a sup
pply shock iss higher than
averrage and ourr natural bias
s should be tto expect som
me agriculturre prices to aappreciate.
Mod
dels are now predicting th
hat an El Niñ
ño is likely du
uring the nortthern hemispphere summe
er in
2014
4. As a resullt of these predications w
we should be on the looko
out for furtheer weather
1
For media distrib
bution. March
h 2014
disru
uptions, with the likelihoo
od that they w
will persist in
nto the northe
ern hemispheere summer and
affecct the major crops. We believe there is significantt upside for grain
g
prices sshould the El
Niño
o develop. Considering th
he potentiallyy severe wea
ather shock, we have mooved from a
nega
ative to a neutral view on
n agriculture..
FX Carry- attra
actively va
alued but ca
aution warrranted
Follo
owing the lattest series off rate hikes frrom several emerging ma
arket centrall banks, high
her
yield
ding currenciies have bec
come more a
attractively prriced. Figure 2 looks at caarry spreads
s
both
h in absolute terms and re
elative to the
e yield on US
S Treasuries. We look at carry spread
ds for
our carry baskett (buying currrencies with high interestt rates and selling those w
with lower ra
ates)
overr a five year period to con
nstruct decile
es. The first decile
d
is whe
ere carry is thhe most
expe
ensive in the
e five year pe
eriod and the
e tenth decile
e is where it is the cheapeest. As Figurre 3
show
ws, both the absolute and
d relative sp reads are cu
urrently in the
e tenth decilee.
Figu
ure 2: Absollute and rela
ative carry s
spreads in decile
d
terms
s over a five year period
d
10
8
6
4
2
0
Dec-04
Dec-05
Dec-06
6
Dec-07
Dec-08
Absolute spread
Dec-09
D
Dec
c-10
Dec-111
Dec-12
Dec-13
Relative spread
Sourcce: Schroders, March 2014
How
wever, while we
w see value
e in high yiel ding emergin
ng market cu
urrencies, wee remain
conccerned by a number of fa
actors. High yyielding eme
erging market currencies tend to be
heavvily exposed to capital ou
utflows assocciated with th
he tapering of
o quantitativve easing in the
t
US d
due to their dependence
d
on external liquidity to fu
und their currrent accountt deficit positions
and other short-tterm financin
ng needs. W hile the norm
malisation of US monetary
ry policy will not
be ssupportive for these mark
kets from a liq
quidity persp
pective, the path
p
these cuurrencies tak
ke
and the differencces between them will be
e determined
d by their dom
mestic fundaamentals and
d the
exte
ent to which they
t
are able
e to benefit frrom the broa
ader global ec
conomic recoovery over th
he
med
dium term. Th
his could be more difficullt for currenc
cies such as the Braziliann real, Chilea
an
peso
o and Russia
an ruble whic
ch may not b
benefit from increasing global growth as they rema
ain
veryy sensitive to
o the commod
dity cycle.
In th
he short term
m, investor se
entiment towa
ards emergin
ng market cu
urrencies is liikely to be drriven
by g
geopolitical risks, policy re
esponses in emerging markets and th
he prospect of further
wea
akness in activity data. Already in 201 4 there have
e been conce
erns about eemerging market
conttagion follow
wing the significant devalu
uation of the Argentinian peso and thee escalation in
tenssions betwee
en the Ukrain
ne and Russi a. Meanwhile there are lo
ocal or natioonal elections
s
sche
eduled in a number
n
of em
merging coun
ntries during 2014, includ
ding India, Inddonesia, Sou
uth
Africca, Brazil and
d Turkey, wh
hich could cre
eate politicall risk and actt as a catalysst for higher
vola
atility over the
e coming mo
onths, triggerring further outflows from foreign inveestors.
As a result we believe it is se
ensible to sta
ay on the sidelines for no
ow, but we exxpect to turn
more positive on
n high yieldin
ng currenciess once there is greater cla
arity on thesee risks and
nega
ative emerging market flo
ows have sta
arted to stabilise.
2
For media distrib
bution. March
h 2014
For further info
ormation ple
ease contactt the Schrod
ders PR team
m:
Este
elle Bibby, Se
enior PR Manager, Europ
pean Institutional
+44 (0)20 7658 3431/ estelle
e.bibby@sch
hroders.com
Cha
arlotte Banks, PR Manage
er, UK Interm
mediary
+44 (0)20 7658 2589/
2
charlo
otte.banks@sschroders.co
om
Geo
orgina Roberrtson, PR Ma
anager, Intern
national
+44 (0)20 7658 6168/ georgina.robertson
n@schroders
s.com
Kath
hryn Sutton, PR Executiv
ve, Internatio
onal
+44 (0)20 7658 5765/ kathry
yn.sutton@scchroders.com
m
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The views and opinions
o
conttained herein
n are those of
o Multi-Asset Investmentt and may no
ot
nece
essarily repre
esent views expressed o
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oders commuunications,
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3