Q The commodity boom offers exciting opportunities for investors, with metals in particular soaring in price. I would like to invest into the sector and am prepared to invest for five years, but having capital protection at maturity is very important to me. What returns can I expect to receive over the next five years and what level of participation can I expect? I was offered a product from my bank that would only give me 85% of the growth of a basket of commodities.
A There is undoubtedly sustained demand for commodities, such as base metals, from the emerging economies of Brazil, Russia, India and China (BRIC) as well as the developed economies of the West.
Industrial metals are in a strong technical uptrend and, if you are looking at the next four to five years, then you may wish to consider a product that includes metals such as aluminium, zinc and nickel.
Aluminium demand comes from the construction and transport expansion sectors with construction certainly accelerating. Demand from China is expected to grow more strongly than expected.
After a period of stagnation, usage of primary aluminium in Japan has been reviving. Demand in India is booming, squeezing the export availabilities of domestic smelters.
Zinc is primarily used to galvanise metals, such as iron, to prevent corrosion. It is extensively used in the construction industry, which is experiencing explosive growth, particularly in the BRIC countries.
Nickel is used in many industrial and consumer products, including stainless steel, magnets and coinage. Current global demand is estimated to exceed 1.3 million tonnes on the back of expansion in output capacity in China and strong support from producers in the US, Japan and Europe.
I would consider a product that invests in a basket of these three commodities. Investors should expect a return of 120% of the growth of the basket - much more than the 85% you were offered!
Some products also offer added enhancements, such as a bonus feature of 8% that is also paid if any one of the commodities ends up higher than the initial price. The absolute minimum return would therefore be 108% of your initial investment. Take the following example:
If the commodity basket performance is +20% at the end of the term, you will receive an actual return of +32% (+20% x 120%, plus a 8% bonus), in addition to your original capital.
To help you make your decision, you may be interested to note that, since 2000, the basket of aluminium, nickel and zinc has performed as follows (measured over all four-and-a-half-year periods from 2000 to present):
Maximum return: 425%
Average return: 152%
Minimum return: 10%
Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com.
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Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.