Savings

HSBC Investments an early bull in the soft commodities rally has turned short-term bear in anticipation that the asset class will cool further in coming months.

Charlie Morris, manager of HSBC Investments Absolute Return Service, a managed portfolio service with $2.5bn assets under management, has sold all remaining exposure to soft commodities, including grains, coffee, sugar and cotton. Morris has used the proceeds from this trade to increase exposure to industrial metals.

Morris said: While the longer term-supply and demand imbalance remains a key driver for agricultural commodities, the recent price movements have been overwhelmed by extreme levels of financial speculation. Although the long-term strength may well continue, the sector needs to cool before this is likely to happen and some further price consolidation over coming months is now likely.

The portfolio now holds zero exposure to soft commodities, down from its peak of 8% in January 2008, held via an exchange traded fund. Overall commodity exposure in the portfolio is also down to 5.7%, from its peak of 15% in January 2008.

Morris said commodity prices were clearly over extended in most areas. Over the past nine years, an equally weighted commodity basket (as defined by the Continuous Commodity Index ) has risen 209%, similar to the 235% rise over a nine-year period in the 1970s (1971 to 1980), another period of dollar weakness.

Within HSBC Investments Absolute Return Service, soft commodity exposure has been replaced with a small holding in industrial metals, also via an ETF. This basket comprises 38% aluminium, 32% copper, 15% zinc and 15% nickel.