commodities outlook: the battle between deflation & reflation may 2009 michael lewis, managing...
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Commodities Outlook:
The Battle Between Deflation & ReflationMay 2009
Michael Lewis, Managing Director, Global Head of Commodities [email protected]; London (44) 20 7545 2166
Sector 3M View Comment
Precious Metals
Energy
Industrial Metals
Agriculture
Energy
We believe OPEC production cuts and a less hostile economic environment have established
a strong floor to crude oil prices. However, we remain concerned towards the ability of the
global economy and specifically the US and China to find a self-sustaining recovery. As a
result, we expect OPEC will need to take further action to defend oil prices into the second
half of the year. Indeed history would suggest it can take up to 12 months from the start of an
OPEC production cutting cycle to stabilise oil prices. If this is repeated in this cycle then it
would imply oil prices stabilising in the fourth quarter of this year.
Industrial Metals
We expect the negative implications on economic output from the deepening financial crisis
will drive metal prices lower. After a rebound in Chinese economic activity in the first half of
this year, we believe the sector is still vulnerable in the short term to measures to curb
Chinese loan growth and a slowdown in fixed asset investment growth. However, we believe
fundamentals will start to improve as global equity markets recover, US growth turns positive
and as the market prepares for the start of a new Fed tightening cycle. Moreover, production
cuts, most notably in zinc and nickel, provide upside price spike risk in these markets when
demand eventually recovers, in our view. For time being, we believe copper has overplayed
the reflation theme. Not until US GDP hits rock bottom and US industrial production growth
starts to turn high will we expect the industrial metals complex to start to out-perform the
precious metals complex. We expect this to occur from the fourth quarter of 2009.
Precious Metals
We believe the rapid decline in real interest rates is providing a more supportive backdrop to
gold prices into 2009. We believe further advances in the gold price will require additional US
dollar weakness. One scenario could be another relapse in global equity markets, which
prompts the US Federal Reserve to adopt additional quantitative easing steps. However, as
risk aversion moderates and in the absence of further US dollar weakness we believe gold
prices are still trading rich relative to EURUSD.
Agriculture
Like many commodity sectors, agricultural returns have suffered one of their deepest
corrections in over 30 years during 2008. As a result, agricultural prices are trading at a
significant discount to their long run historical averages in real terms. Even so fundamentals in
some markets still remain tight and we would therefore view some upside potential in this
sector during 2009 if fundamentals do not slacken from here. However, we expect weak oil
prices will constrain price advances in this sector during this year, with any rallies likely driven
by adverse supply shocks.
Agriculture
2
The Re-Pricing Of Commodities: Index, Price, Spread & Vol
#1 Commodity Indices
Source for all charts: DB Global Markets Research, Bloomberg
#2 Baltic Dry Index #3 Nickel-To-Gold Ratio
#4 Platinum-To-Gold Ratio #5 Crude Oil Contango #6 Commodity Volatility
1M vs. 12M WTI time spread
-30
-25
-20
-15
-10
-5
0
5
10
15
1999 2001 2003 2005 2007 2009
Supercontango
0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009
Gold
WTI
Nickel
Copper
6M implied vol
0
20
40
60
80
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
1980-1982recession
1990-1992recession
2000-2001recession
Ratio at 26 year low
0
2000
4000
6000
8000
10000
12000
1985 1988 1991 1994 1997 2000 2003 2006 2009
Down 85% from the peak
0.7
1.0
1.3
1.6
1.9
2.2
1976 1980 1984 1988 1992 1996 2000 2004 2008
Ratio hits 15 year low
20
40
60
80
100
0 4 8 12 16 20 24 28 32 36 40
Nov-74
Oct-80
Oct-90
Oct-97
Nov-00
Jul-08
Number of weeks after S&PGSCI peaked
S&PGSCI peak = 100
Down 70% from the peak
5
Implied roll return hits -70%
The New World Order For Commodities
The emergence of China and India as new super-commodity consumers.
– Urbanisation
– Rising living standards
Underinvestment in productive capacity.
– Tightening credit conditions
The depreciation of the US dollar.
– Current account & budget deficits
Elevated levels of geopolitical risk.
– Low oil prices & political instability
The increasing frequency of extreme weather events.
– Global warming
The migration of new risk capital into the commodity complex.
– The search for yield, diversification and inflation protection.
6
Equity Markets Recover Several Months Before The Recession Ends
Reflation Watch: S&P500
Source: DB Global Markets Research, NBER, Bloomberg
Since 1948, the S&P500 has tended to turn higher six months before the US recession ends. If sustained, the rally in the S&P500 today would, in our view, suggest that equity markets are calling for the US to
leave recession from September 2009. We believe this is too optimistic and consequently view equity market rallies
during the second quarter as based on shaky foundations.
Outlook
7
100
120
140
160
180
200
220
-300 -250 -200 -150 -100 -50 0 50 100 150 200 250 300
100
120
140
160
180
200
220
Recession
Current episode (assumes 9-Mar-09 as S&P500 trough)
Average of S&P 500 around US recessions since 1948
Number of days before/after S&P500 troughs
Index Index
Turning Points In US Economic & Financial Indicators Around US Recessions
Positioning For Reflation
Outlook
The last row of the table above examines at what point during 2009 the various economic indicators will turn assuming
the US recession ends in December 2009. In April, the US recession entered its 17th month. As a result, it surpasses in length the 1973-75 and 1981-82
downturns and represents the most durable downturn since the Great Depression. Since we expect US GDP growth to resume only in January 2010, the length of this recession will be on a par with the
15 economic downturns that occurred between 1857 and 1919. We find that the index of US leading indicators and the S&P500 have been the most forward looking indicators in
predicting an end to a US recession turning between five to six months before the economy moves out of recession.
8
Global Oil Demand Under Attack
83.0
83.5
84.0
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Month IEA forecast w as made
Fore
cast g
lobal
oil
dem
and
by y
ear
2006
2007
mmb/d
2008 2009
IEA Estimates For Global Oil Demand
Since 2005, official forecasts for global oil demand have been too optimistic. We estimate that global oil demand growth is equivalent to world GDP growth less 2%. Since we expect global GDP to contract
by 1.9% this year it implies global oil demand could fall by almost 3%. Hence downside risks to global oil demand persist in our
view.
Outlook
Source: IEA, EIA/DOE, OPEC, DB Global Markets Research
Estimates For Global Oil Demand By Agency
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
2001 2002 2003 2004 2005 2006 2007 2008 2009e
IEA
OPEC
EIA
Actual
mmb/d
Current forecasts for 2009
DB
Forecasts at start of years 2001-08 vs actual outcome
12
Source: IEA
60
70
80
90
100
110
120
130
140
150
-14 -7 0 7 14 21 28 35 42 49 56 63 70
WT
I oil
price=100 in
the d
ay b
efo
re q
uota
reductio
n Mar-93 Apr-98 Jul-98
Apr-99 Feb-01 Apr-01
Sep-01 Jan-02 Nov-03
Apr-04 Nov-06 Feb-07
Number of trading days before and after OPEC quota reduction
1998
2001
Oil Prices & OPEC ActionOPEC Quota Reductions & The Oil Price
Source: DB Global Markets Research, OPEC, Bloomberg
OPEC has a good track record in defending oil prices. However, their success evaporates when global growth is under
attack as occurred in 1998 and 2001. This year is proving to be no different as OPEC struggle to cut production as fast as
world growth is slowing.
Outlook
13
Oil Prices & OPEC Production Cuts
OPEC production cuts in 1998 and 2001 totaled 4.5 and 5.0mmb/d respectively. The quota reduction cycle lasted for 12
months and oil prices did not stabilise until just after the last cut in quotas. If this is repeated today it would imply production cuts continue until September 2009 and that oil prices will stabilise in the
fourth quarter of this year. However, oil prices can recover rapidly in the early stages of an economic upturn. For example, in 1999 and 2002, oil
prices rallied between 35-80% within six months of the last production cut.
OPEC Quota Cuts & Crude Oil Prices
Source: OPEC, DB Global Markets Research, Bloomberg
Outlook
14
Oil Production Declines Naturally Over Time
Global Oil Production Forecasts
60
65
70
75
80
85
90
95
2008 2009 2010 2011 2012 2013 2014 2015
mb/d Onstream Reserves growth Under development
Probable Other discoveries Yet-to-find
Wood Mackenzie’s estimates that in the absence of new investment, the global oil production base will decline from 86mmb/d
to 75mb/d by 2015 as a result of accelerating depletion rates particularly outside OPEC. Indeed, given that in recent year’s industry production in mature OECD markets has increasingly been dominated by smaller
E&P companies, many of whom are now suffering from a lack of liquidity given the credit crisis, it would seem reasonable to
assume that decline rates in mature oil producing regions are almost certain to accelerate.
Source: Wood Mackenzie, DB Global Markets Research
Outlook
0% 5% 10% 15% 20% 25%
FSU
China
Latin America
US Onshore
Canada
Other Asia
Africa
Middle East
Non-OPEC average
Norway
Australia
US Offshore
UK
Non-OPEC Decline Rates 2000-2008
16
Source: Wood Mackenzie, DB Global Markets Research
Distortions In The Gold Market
Gold Decouples From USD…
Source for all charts: DB Global Markets Research
…A Flatter Forward Curve…
Price: The first chart measures how far the gold price has moved away from its estimated fair value in US dollars. We measure the
divergence of the gold price from fair value by tracking the residual error derived from the EURUSD to gold price regression model.
At the beginning of this year the gold price had rallied to excessively rich levels of valuation on an FX basis. Curve: The gold forward curve is normally in contango. However, over the last few months the forward curve has flattened
significantly such that the implied roll return has been virtually eliminated. Volatility: Gold implied volatility has risen significantly over the past year such that it is trading close to levels prevailing in the
industrial metals’ market.
Outlook
…And Higher Volatility
11-Jun-2008
17-Apr-2009
18
Line of best f it
Gold trades richrelative to the USD
Gold, EURUSD & The Role Of Exchange Traded Funds
Gold Price & SPDR ETF Flows
We believe physically backed ETFs have been the principle culprit in introducing distortions to the gold market. Inflows into gold
ETFs have allowed the gold price to remain at lofty levels that appear unjustified considering the strength in the US dollar. The flattening in the gold forward curve not only reflects a collapse in global interest rates, but, also the shortage of physical
inventory brought about by the surge in ETF inflows. We believe this is also having an impact on boosting gold implied vol. Relative to the US dollar, gold prices are still trading at rich levels of valuation.
Outlook
Source: Reuters, DB Global Markets Research
EURUSD & The Gold Price
300
400
500
600
700
800
900
1000
1100
1200
Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09
500
600
700
800
900
1000
1100Total gold held in SPDR ETF (tonnes, lhs)
Gold price (USD/oz, rhs)
19
Source: DB Global Markets Research
Gold trades rich relative to the USD
US Dollar Bubbles Compared
Outlook
The upswing and subsequent downswing in the US dollar between 1995 and today bears a striking
resemblance to the 1978-1995 US dollar cycle. If history repeats itself then it implies the US dollar could face
another down-leg and hitting a new all time low in September 2011.
1985 & 2000 US Dollar Bubbles
Source: Bloomberg, DB Global Markets Research
US dollar weakness could
reappear over the next two years.
60
80
100
120
140
160
180
200
0 24 48 72 96 120 144 168 192 216
Oct 1978-1997
J un 1995-Current
Months after trough
USDDEM: October 1978& J une 1995 rebased to 100
USD hits rock bottom in September 2011
1985 & 2000 USdollar bubbles burst
21
China’s Investment Economy
The FAI Cycle In China
Investment represents more than 40% of total GDP in China. This is almost double the ratio in other parts of the region. As a
result, a slowdown in FAI will have a disproportionate effect on the Chinese economy, in our view. Historically a 1 percentage point deceleration in US-EU GDP growth leads to a 6-8 percentage point deceleration in Chinese
export growth. Since we expect G7 GDP growth to slow by approximately 4% in 2009 and Chinese export growth was just over
9% last year, it would theoretically imply Chinese export growth could drop by as much as 20%. Since the fixed asset investment cycle lags the export cycle by around nine months and the FAI sector is three times larger than
the Chinese export sector, we believe this exposes the Chinese economy to another growth recession at the end of this year.
Outlook
Investment as a percent of GDP (2008)
0
5
10
15
20
25
30
35
40
45
Chin
aIn
dia
Korea
Indones
ia
Mala
ysia
Taiwan
Philippin
es
Source: CEIC, DB Global Markets Research
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jun-96 Nov-96 Apr-97 Sep-97 Feb-98 Jul-98 Dec-98 May-99 Oct-99
Export (4mma, yoy%)
FAI (4mma, yoy%)
Exportslowdown
FAI slowdownoccurs 12M later
China’s Export & FAI Cycles During The 1990s
23
Source: CEIC, DB Global Markets Research
China & The Threat Of Softer Metals Demand Ahead
Chinese Copper Imports By Month
At the end of last year, the Chinese government implemented a RMB4tn fiscal stimulus plan. The stimulus package is focused
on the railways, roads, waterways, power grids, agriculture and public housing sectors and accounts for 16% of total FAI. While we see FAI growth rising from 16% to 33% in those sectors targeted to receive government support, we believe this will not
be sufficient to offset the marked slowdown occurring in FAI in the manufacturing and mining sectors, which constitute more than
one third of total FAI. So far this year, the copper price has ignored the deterioration in global economic growth and moved solely on strategic buying in
China, in our view. For example, Chinese copper imports have surged since the end of last year. However, we expect Chinese
copper imports to collapse into the summer in response to a seasonal slowdown in demand.
Outlook
0
50
100
150
200
250
300
J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec
80
90
100
110
120
1302009 imports
2003-2008 average monthlyimports
Source: CEIC, DB Global Markets Research
Manufacturing32%
Mining4%
Agr iculture2%
Rural & other housing 7%
Economic housing 1%
Property developers 16%Others
20%
Other utilities5%
Power grids2%Other
infrastructure 3%
Road & water transport 6%
Railway 2%
Fiscal Stimulus Affects 16% Of Total FAI
24
Source: CEIC, Reuters, DB Global Markets Research
Fed Tightening & Industrial Metals
Industrial Metals Prices & Fed Tightening
Source: DB Global Markets Research, Bloomberg
80
100
120
140
160
180
200
220
240
-18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30 33 36 39
Scale of Fed tightening inthe first 18 months of the cycle:1987: 225bp1994: 275bp1999: 175bp2004: 325bp
1987 cycle
1994 cycle
1999 cycle
Months before/after first tightening move
Fed tighteningbegins
Journal of Commerce Metals Index
2004 cycle
Historically the time to buy industrial metals has been 3-6 months before the start of a new Fed tightening cycle.
Outlook
25
Fed Tightening & Industrial Metals
The Winners & Losers During The Early Phases Of A New Fed Tightening Cycle
Source: DB Global Markets Research, Bloomberg
In the early phases of a new Fed tightening cycle, nickel and copper prices have historically been the strongest performers in
terms of spot price appreciation
Outlook
-40
-20
0
20
40
60
80
100
120
140
Nickel Copper Aluminium Lead Zinc Tin
1987 1994 1999 2004
% change in price in the 12 months after the first tightening move by the US Federal Reserve
58%
42%
30%
5% 14%
-4%
Average price risein the last four tightening cycles
26
The World’s Top Agricultural Producers
Global Agricultural Production
US & World Exports For Agriculture
0
100
200
300
400
500Sugar
Soybean
Rice
Wheat
Corn
Agricultural production in 2008-09 (million tonnes)
0
20
40
60
80
100
120
140
Wheat Corn Soybeans Sugar Cotton
Rest of world exports (million tonnes)
US exports (million tonnes)21%
10%
1%
43%58%US share ofworld exports
Data for 2008-09
We believe fundamentals in the agricultural sector remain relatively strong. We find that agricultural prices have been able to rally even during economic downturns. However, price rallies have tended to
occur in response to a decline in planting acreage and/or droughts. We believe lower corn plantings will provide support to corn prices this year. However, our relatively downbeat outlook for oil
prices this year removes an important ingredient to higher prices in certain parts of the agricultural complex.
Outlook
Source: USDA
27
Source: USDA
Long run is from 1972 with the exception of platinum, palladium and US natural gas where data runs from 1976, 1988 and 1990 respectively.
Source: DB Global Markets Research, Bloomberg, Data as of April 20 2009
Tracking How Far Commodity Prices Are From Their Historical Averages
Valuing Commodities In Real Terms
We estimate that gold is the most richly priced commodity in the world since prices in real terms are trading at a
significant premium to their long run historical average. We find that agriculture and certain parts of the metals complex are trading cheap when measured in real terms .
Outlook
-54-43 -40
-34-24 -24
-16 -15 -15-10
-4 -2
12 16 1628 32
4955
66
-80
-60
-40
-20
0
20
40
60
80
Co
tto
n
Co
ffe
e
Alu
min
ium
Su
ga
r
US
na
tura
l g
as*
Pa
llad
ium
*
Whe
at
Tin
Co
rn
Zin
c
So
ybe
an
s
Nic
ke
l
Silv
er
Ura
niu
m
Co
pp
er
Cru
de o
il
Le
ad
Co
co
a
Pla
tin
um
Go
ld
How far prices in real terms are currently trading compared to their average price since 1972
Expensive
Cheap
28
Corn, Soybeans & Wheat Inventory-to-Consumption Ratio
Global Grains Inventory Remain At Relatively Low Levels
Source: USDA
0
20
40
60
80
100
120
140
160
180
1965 1970 1975 1980 1985 1990 1995 2000 2005
Day
s of
use
Corn inventory-to-use ratio
Wheat inventory-to-use ratio
Soybean inventory-to-use ratio
Total available stocksdivided by daily consumption
Unlike the energy and metals complex, we have not seen a dramatic increasing in inventory building in the agricultural
complex. Indeed global inventory-to-consumption ratios remain at relatively low levels. We believe the next major release will be
the USDA’s projections for global inventories to be published in May.
Outlook
32
Chinese Agricultural Imports Are Increasing
China’s Trade Position In Agriculture
-40000
-30000
-20000
-10000
0
10000
20000
1960 1966 1972 1978 1984 1990 1996 2002 2008
Soybeans Corn
Wheat Cotton
China's net trade balance in:
Tonnes (000s)
Rising netimports
Source: USDA, Global Markets Research
China has become increasingly reliant on agricultural imports. The country may already be building strategic reserves in a
number of agricultural commodities, such as soybeans and rice. Urbanisation and rising living standards are expected to intensify agricultural shortages over the medium term.
Outlook
33
US Planting Intentions
US Acreage & The Role Of Oil
Crude Oil & Corn Prices
The first chart tracks the net change in acreage for the four US major crops. Note these changes do not measure actual changes
in acreage but the intended changes in plantings declared by US farmers at the end of March for the next marketing year. We find that many agricultural commodities have displayed a loose positive correlation with the oil prices, for example rubber,
palm oil, soybeans, corn and rapeseed. Consequently, we believe a constraining factor for higher agricultural prices in 2009 could be the lacklustre outlook for crude oil
prices.
Outlook
Net change in US crop acreage accordingto the annual prospective plantings survey
-10
-5
0
5
10
15
2002 2003 2004 2005 2006 2007 2008 2009
Cha
nge
in a
crea
ge (
mill
ion
acre
s)
Corn Soybeans Wheat CottonCorn & wheat acreage cut 0
100
200
300
400
500
600
700
800
0 20 40 60 80 100 120 140 160
Cor
n pr
ice
(US
c/bu
shel
)
Crude oil price (USD/barrel)
Data from 2003-2009
Source: USDA
34
Source: Bloomberg
Commodity indices are the most commonly used underlying for investments. Major differences exist in terms of futures roll rules and sector allocations.
Once the investor has chosen a suitable commodity index, the exposure is obtained in the form of a structured note, fund or swap/option.
Commodity returns are generated from spot price movements as well as from the futures rolls (=roll yield). In backwardated markets investors generate a positive roll yield, in contango markets investors incur negative roll returns
Deutsche Bank has created a series of award winning commodity indices:
Feb’03 Launch of the Deutsche Bank Liquid Commodity Index, DBLCI
Feb’03 Launch of the DBLCI-Mean Reversion Index, DBLCI-MR
May’06 Launch of the DBLCI-Optimum Yield Index, DBLCI-OY
Jan’07 Launch of the DBLCI-OY Broad Index
Jan’07 Launch of the DBLCI-OY Balanced Index
Jan’07 Launch of the DBLCI-MR ‘Plus’
Dec’07 Launch of the DB Commodity Harvest Index
Sep’08 Launch of the DBLCI-MR Enhanced
Sep’08 Launch of the DBLCI Long-Short Index
Commodities As An Asset Class & The DBLCI Family
35
The Evolution Of Commodity Indices
DBLCI - Fixed weight, fixed roll index
- Invests in 6 commodities
S&P GSCI - Fixed weight, fixed roll index
- Invests in 24 commodities
DJ-AIGCI - Fixed weight, fixed roll index
- Invests in 19 commodities
DBLCI - MR - Dynamic sector weights
- Invests in 6 commodities
DBLCI - MR
‘Plus’- Dynamic weight and
dynamic allocation index
- Downside protection
DBLCI - OY Balanced
- Fixed weight, dynamic roll index
- Invests in 14 commodities
DB Commodity Booster Index
- Replicates benchmark commodity index using Optimum Yield
Sector Focus: DB Agriculture Index
- Dynamic roll index comprising 7 agriculture commodities
The choice of commodity index needs to be aligned with the investment objectives of the investors.
Beta Allocation Strategies1991 - 2003
Enhanced Beta Allocation Strategies2003 - 2007
Alpha Generation Strategies2008
DB Commodity Harvest Index
- Return from roll yield
- Provides exposure to outperformance of DB Commodity Booster Index against the benchmark S&P GSCI SM
36
The Battle Between Spot & Roll
-30
-20
-10
0
10
20
30
Energy PreciousMetals
IndustrialMetals
Agriculture Livestock
Spot return Roll return Excess return
% returns ytd
The Composition Of Returns In 2009
Outlook
In contrast to 2008, when the lion’s share of commodity index returns’ weakness was attributable to lower spot prices, so far in
2009 contango forward curves and the implied roll return have become the Achilles heel to long only commodity index investors. We find that while spot returns have been sufficiently large enough in the precious and industrial metals’ sectors to overwhelm
the negative roll return, this was not the case in the energy and livestock sectors, where negative roll returns have been
significantly larger than spot returns since the end of last year.
38
Source for all charts: DB Global Markets Research, Bloomberg (Data as of April 21, 2009)
The Composition Of Returns In 2008
-60
-50
-40
-30
-20
-10
0
10
Energy PreciousMetals
IndustrialMetals
Agriculture Livestock
Spot return Roll return Excess return
% returns
DB Commodity Harvest Index
Outlook
The DB Commodities Harvest index not only has a zero correlation with other asset classes such as bonds
and equities, but, it also exhibits a negative correlation with the base index S&PGSCI Light Energy index. Since the DB Commodity Harvest index is designed to be non-directional, the returns are largely independent
of spot price movements. This unique property has enabled the index to deliver strong positive returns during
downturns in commodity markets.
Index Details
Source: Bloomberg
Summary Rule based, non directional index that seeks to generate stable alpha commodity returns without taking direct exposure to commodity spot prices. This strategy would have generated impressive alpha returns of approx. 5.5% per annum since 1997.
Components DB Commodity Harvest Index takes a long exposure to the DB Commodity Booster Index – S&P GSCISM Light Energy and a short exposure to the S&P GSCISM Light Energy
Rebalancing The long and short exposure is rebalanced on a monthly basis to minimise the exposure to commodity spot prices. Further, the weight of each commodity in the long exposure is re-set annually to match the weight in the short exposure
Currency Available in USD, EUR and JPY
S&P GSCI Light Energy Weighting
Live CattleWheat
GoldAluminum
WTI
Feeder Cattle
Red Wheat
Copper
Silver
Brent
RBOB Gas
Lean Hogs
Corn
Lead
Soybeans
Nickel
Heating Oil
GasOil
Cotton
Zinc
Natural Gas
SugarCof fee
Cocoa
0%
5%
10%
15%
20%
25%
30%
35%
40%
Energy (39.4%) Industrial Metals(16.8%)
Precious Metals (5.1%) Agriculture (30.8%) Livestock (7.8%)
Investments via swaps (ER +TR), certificates, and structured notes
and options
Components of the S&PGSCI-LEI
44
Commodity Index Scorecard
Total returns since the end of 2008 (%)
-13.5-12.0
-10.6-9.1
-6.4-5.4
-2.0 -1.5
2.5
6.0
-15
-10
-5
0
5
10
S&PGSCI
DBLCI DBLCI-MR
DBLCI-OY
DJAIG RJ/CRB DBLCI-OY
Balanced
DBLCI-MR Plus
DBHarvestIndex
DBHarvest10% TV
Alpha Strategies Continue To Perform
Source: DB Global Markets Research, Bloomberg (Data as of April 20, 2009)
Outlook
The OY methodology enables Deutsche Bank to create non-directional, market neutral exposure to commodities. This is done by
combining the short exposure to a benchmark commodity index with an equivalent long exposure through replication of that index
using the OY methodology
– DB Commodity Harvest Index is designed to provide market neutral stable returns at a low volatility
– DB Commodity Harvest 10 Vol Index is designed to provide a target vol exposure to the DB Commodity Harvest
Index
The DBLCI-OY & The DB Commodity Harvest
-30
-25
-20
-15
-10
-5
0
5
10
15
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
DB Commodity Harvest
DBLCI-OY
Total returns (% mom)
43
Source: DB Global Markets Research
Commodity Index Returns Scorecard
Total Volatility** Excess SharpeReturn* Return* Ratio # maximum no. of months < -5%
Beta allocation indices
DBLCI TM 8.64% 23.26% 5.14% 22.10% -24.43% 25
S&P GSCI TM 1.38% 24.35% -1.92% -7.90% -27.14% 29
DJ-AIGCI SM 3.19% 16.69% -0.18% -1.06% -21.15% 20
Mean reversion based indices
DBLCI-MR TM 9.55% 19.13% 6.01% 31.43% -19.56% 21
DBLCI-MR TM 'Plus' 14.53% 13.43% 10.83% 80.68% -8.73% 8
DBLCI-MR TM 'Enhanced' 10.06% 15.90% 6.51% 40.94% -21.83% 11
DB Commodity Trend 14.28% 11.78% 10.76% 91.36% -15.12% 4
Optimum yield based indicesDBLCI-OY 11.94% 19.91% 8.32% 41.82% -22.75% 17
DBLCI-OY Balanced 10.65% 16.08% 7.08% 44.03% -22.06% 11
DB Commodity Booster Index - S&P GSCI TM 10.55% 20.49% 6.98% 34.07% -24.43% 16
DB Commodity Booster Index - DJ-AIGCI SM 9.94% 14.77% 6.39% 43.24% -20.08% 9
DB Agricultural Index 2.75% 16.81% -0.41% -2.44% -15.15% 13
Market neutral alpha indicesDB Commodity Harvest Index 9.24% 3.52% 5.71% 162.43% -3.18% 0
DB Commodity Harvest Index - S&P GSCI TM 11.44% 6.22% 7.84% 126.08% -6.52% 1
DB Commodity Harvest Index - DJ-AIGCI SM 7.71% 5.37% 4.23% 78.81% -9.19% 1
Other asset classesEquities (S&P 500) -0.04% 21.44% -3.59% -16.76% -16.43% 20
Fixed Income (US Govt. All Total Return) 6.43% 5.12% 2.88% 56.19% -3.93% 0
* annualised return based on total return and excess return ** annualised vol of the daily lognormal returns # calculated as a quotient of excess return and the volatility ## based on total return
Data from January 1998 to March 2009 ***
***Data for DB Agricultural Index and DB Commodity Trend from January 1999
Monthly drawdown ##
Comparative Performance Table
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Spot neutrality means significant drawdown events are a rare occurrence for the DB Commodity Harvest Index
Source: DB Global Markets Research, Bloomberg
# calculated as a quotient of excess return and the volatility ## based on total return
Data from January 1998 to March 2009 ***
***Data for DB Agricultural Index and DB Commodity Trend from January 1999
Commodities Outlook: Key Themes
Oil prices to trade sideways. Price rallies to become more sustainable from 2010.
Energy
Gold price rallies require another relapse in global equity markets & further USD weakness.
Precious Metals
The sector is fundamentally cheap. Oil price weakness is expected to limit price advances in the sector during 2009. We expect rallies to be driven by supply side events related to weather or lower crop
plantings until demand recovers during 2010.
Agriculture
Contango will sustain headwinds for long only commodity indices. We prefer bullish alpha plays such as the DB Commodities Harvest Index.
Commodities Indices
Industrial metals to outperform gold from the fourth quarter of the year. We view fundamentals as strongest in copper and zinc, weakest in aluminium.
Industrial Metals
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Deutsche Bank Commodities Research Deutsche Bank Commodities Research compliment fundamental and financial analysis on the four broad
commodity sectors with the aim of delivery of directional, forward curve, volatility and relative value trade ideas.
These trades are then employed and executed as part of the team’s proprietary trading book.
If you would like to subscribe to more than 30 other commodity research products please contact your local DB
Sales person.
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Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Michael Lewis
Appendix 1: Certification and Disclaimer
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Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Appendix 1: Regulatory Disclosures
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Appendix 1: Disclaimer
Global DisclaimerInvesting in and/or trading commodities involves significant risk and may not be suitable for everyone. Participants in commodities transactions may incur risks from several factors, including changes in supply and demand of the commodity that can lead to large fluctuations in price. The use of leverage magnifies this risk. Readers must make their own investing and trading decisions using their own independent advisors as they believe necessary and based upon their specific objectives and financial situation. Past performance is not necessarily indicative of future results. Deutsche Bank makes no representation as to the accuracy or completeness of the information in this report. Deutsche Bank may buy or sell proprietary positions based on information contained in this report. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof. This report is provided for information purposes only. It is not to be construed as an offer to buy or sell any financial instruments or to participate in any particular trading strategy.
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