The recent performance of commodities during an equity crisis should convince investors of the asset class’s diversification benefits, according to WisdomTree.
While its low correlation with equities has always been a strong argument for proponents of commodity investments, Nitesh Shah, head of commodities and macroeconomic research at WisdomTree, noted that critics have historically argued this does not hold up in periods of crisis.
However, in digging into the relative behaviour of commodities in periods of equity crisis, Shah said that WisdomTree observe that commodities have offered “very strong” diversification to an investor.
“Taking the example of the worst month for equities in the last 60 years or so, US equities lost 21.5% in October 1987, following ‘Black Monday’,” he said. “During the same month, the Bloomberg Commodity Index (BCOM) gained 2.1%.”
In fact, according to WisdomTree, commodities have outperformed equities in 19 of the worst 20 months for the S&P 500 since 1960, which Shah argued would have provided “incredible help” to investors.
More recently, Shah said commodities have outperformed every major asset class in the last two yeas by double-digit margins, with BOCM posting a gain of 12% over the calendar year.
Despite this, a survey of 600 professional investors conducted by WisdomTree and CoreData Research in September last year showed that 46% of those asked did not invest in commodities.
“We believe, whether you look at recent or long-term data, the case for broad commodity exposure is compelling,” he said. “On top of being a historically excellent diversifier, the next installment will highlight how broad commodities could complement equities in different parts of the cycle.”