Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

14

Gaining Exposure to Emerging Markets in Institutional Portfolios: The Role of Commodities

George A. Martin and Richard Spurgin

14.1 INTRODUCTION

Two significant investment themes in the past decade have been the growing importance of physical commodities in the workings of the global economy (hereafter, the “Commodity” theme), and the increasing importance of “developing” nations such as Brazil, Russia, China and India as sources of economic growth and poles of wealth accumulation (the “Emerging Markets” or “EM” theme). Because these and other developing countries are either major exporters of commodities such as oil, or primary sources of demand for physical commodities for domestic consumption or inputs in export production, it is not surprising that these two investment themes are linked. However, outside of these casual observations, there is relatively little research that explores the possible linkages between these two investment themes.

This chapter sets out to explore some of those possible linkages, and correspondingly the extent to which investments in commodity assets and emerging-markets assets are overlapping bets on the same or similar economic trends. Our goal is to offer plan sponsors and other long-term institutional investors information that could be useful elements for the efficient formulation of investment strategy. A question of particular interest is whether a well-designed portfolio of EM investments can replace the role of commodities in a diversified ...