Make Space For Commodities In Your Portfolio, Says UBS

by Phillip Morton, Investors Offshore.com

28 August 2006

Given long-term demand forecasts for natural resources, investment bank UBS has urged investors to make room for commodities as part of a balanced portfolio.

The new report, "UBS research focus" released by Wealth Management Research analyses how continued strong economic growth rates in highly populated emerging market countries will affect the long-term supply and demand balance for scarce natural resources, and discusses the implications that this has for investments in commodities.

According to the UBS report, consumption of natural resources will expand during the next two decades, driven by continued industrialization and growth of domestic demand in emerging market countries. UBS assumes that oil consumption will remain strong in the near term and projects that production capacity will likely trail demand due to geopolitical instability in key oil producing regions. This points to continued oil supply and demand imbalances for at least the next five years. Over the long term, UBS believes that the peak in oil production is likely to occur between in the mid- to late-2020s. By 2030, UBS expects that natural gas would have eclipsed oil production.

In base metals, short-term supply will continue to be hindered by issues relating to underinvestment in mining extraction capacity, as well as international trade and legislative restrictions regarding the environmental consequences of mining, says UBS. While the bank's projections show that capital expenditures on metals production is increasing, this is unlikely to have a significant impact on supplies for at least the next three to five years. However, over the long term, the report forecasts no issue of depletion in the next 200 years or so for mineral commodities, like ferrous and non-ferrous metals, given the high resource base availability. Nevertheless, supply shortages similar to the current one will emerge from time to time, it said.

"Given our long-term outlook on commodities, particularly the impressive demand forecasts for emerging markets, UBS thinks that investments in natural resources should play a role in most private investors’ portfolios and will be able to stabilize portfolio returns," the research highlighted.

"Projections of near-term supply shortfalls in natural resource markets, combined with the potential for future substitution effects, suggests that active portfolio management strategies are becoming increasingly relevant for investments in commodities," UBS concluded.

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