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QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
QMS Advisors - Commodities & Natural Resources
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QMS Advisors - Commodities & Natural Resources

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Main Factors Driving Our Energy Commodity Forecast: …

Main Factors Driving Our Energy Commodity Forecast:
Global Economic Growth indicators
Global Energy Intensity factors
Supply Capacity: Oil and Gas Extraction, Refinery capacity
Term-Structure: Commodity Futures and Global Interest
Rates
Global Commodity Inventories and SPR builds
Producers, Consumers, Exporters and Importers Flows
(IEA)
US Dollar Currency Basket
Global Risk Aversion Parameter
Wet freight index
Capital Expenditures in the energy complex – Exploration
Spending
 CFTC reports - Hedgers and Speculators positions
 Global weather trends
 OPEC Policies and Discipline

Main Factors Driving Our Energy Commodity Markets Forecast
 Our model is a composite of seven modules that cover demand, supply, conversion, distribution
as well as transmission constraints. Following are the most significant signals that explain our
forecast of the likely future developments in the Energy markets:
 On the demand side:
 Demand from institutional investors for assets providing hedges against unexpected
inflation.
 Demand growth for energy products. The emergence of China and India as major
commodity consumers with low energy-efficiencies leads to increased energy
demand sensitivities.
 Low price-elasticity in developed markets, resulting in little demand destruction
through price increases.
 Limited number of substitutes and underdeveloped alternative sources of energy.
 A weaker US Dollar, supporting global demand by making international purchases
relatively cheaper.

Main Factors Driving Our Energy Commodity Markets Forecast
 On the supply side:
• Lack of marginal capacity of production in the Energy complex which affects the
short-term supply/demand equilibrium.
• Limited incremental supply and distribution capacity due to past under-investments
across the energy complex (Lack of oil and gas exploration and R&D expenses,
under-investments in global refinery capacity and distribution channels).
• Long-term supply is essentially a lagged response future price signals. High
marginal costs of production require high future price levels to provide incentives to
commit firms’ capital to volatile long-term investments.
 Market derived signals: The current contango in the NYMEX WTI, Gasoline, Heating Oil
and IPE Brent and Gasoil forward curves supports our assumption of price appreciation in
the short run and substantial roll-yield in the longer run.
 Other factors: Migration of speculative and institutional capital into the complex,
heightened geopolitical risks, vulnerability of oil infrastructure leading to potential supply
disruptions, lack of transparency resulting in market price manipulation.

Most significant signals in the likely future developments in the Industrial Metal markets:
 On the demand side:
 Strong relative demand growth for Base Metal products. The emergence of China
and India as major consumers of Base Metals increased Base Metals demand
sensitivities. (Massive investments in local infrastructure).
 Lack of price-elasticity, negligible demand destruction through price increases
 Limited number or lack of substitutes for Base and Precious Metals.
 A weaker US Dollar, supporting global demand by making international purchases
relatively cheaper.
 On the supply side:
 Lack of marginal production capacity in the short-term in the Base Metals complex
(Aluminum, Copper, Zinc, Nickel).
 Depleted inventories (Copper, Nickel).
 Limited incremental supply and distribution capacity due to past under-investments
across the Base Metals complex (Depleted mines, lack of specialized labor, limited
dry freight capacity).
 Upward cost pressures from labor demands and rising input prices.

Grouping asset classes helps reveal the main
sources of diversification
 Maximum portfolio diversification requires
incorporating strategies at both ends of
the spectrum
 Commodities offer maximum distances
resulting in greatest diversification

Published in: Economy & Finance, Business
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  • 1. Deriving Long-Term Strategic Commodity Return Expectations: The Energy Complex Q M S Advisors . . Av. De la Gare, 1 | 1003, Lausanne | CHThis material does not constitute investment advice and should not be viewed as tel: 078 922 08 77a current or past recommendation or a solicitation of an offer to buy or sell any e-mail: info@qmsadv.comsecurities or to adopt any investment strategy. website: www.qmsadv.com
  • 2. Long-Term Energy Markets Returns Main Significant Factors Main Factors Driving Our Energy Commodity Forecast: Global n We tio Growth titu ts ath Global Economic Growth indicators bs e Su Effec r Global Energy Intensity factors t Supply Capacity: Oil and Gas Extraction, Refinery capacity Re and men s No EC ion OP pply on Term-Structure: Commodity Futures and Global Interest Su n- v ir lat En gu Rates Long-Term Global Commodity Inventories and SPR builds Energy DisciplineFreight Producers, Consumers, Exporters and Importers Flows OPEC Wet Commodity (IEA) Returns US Dollar Currency Basket Expectation Global Risk Aversion Parameter Ge s S o ne ho litica Wet freight index op eli ck Pip s l St o Capital Expenditures in the energy complex – Exploration g rag Inv And e Spending Re fi nin Value en tor ies CFTC reports - Hedgers and Speculators positions Relative Global weather trends OPEC Policies and DisciplineQ.M.S Advisors Evaluates All Aspects of the Energy Complex to Derive Long-term Expectations Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 1
  • 3. Long-Term Energy Returns A Structural Approach to Deriving Energy Commodity Approach Global Oil and Gas Macroeconomic Supply Activity Module Module Global Energy Transmission Integrating Demand and Distribution Module Module Module Global Energy Refinery / Products Demand Conversion Module ModuleSource: Q.M.S Advisors, IEA, EIAThese materials do not contain any recommendation to buy or sell or a solicitation of an offer to buy or sell any securities or investment services. Credit Suisse Asset Management, LLC provides no determination of suitability or assurances orguarantees regarding the performance of any investment or investment strategy. You are responsible for conducting your own independent investigation and analysis, taking into account your particular circumstances, before deciding upon aparticular investment or investment strategy. Investments in certain asset classes, including hedge funds, carry significant additional risks that you should consider prior to investment. You accept complete responsibility for any investmentdecisions you may make as a result of your use of this material. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 2
  • 4. Long-Term Energy Returns A Structural Approach to Deriving Energy CommodityApproach Main Factors Driving Our Energy Commodity Markets Forecast Our model is a composite of seven modules that cover demand, supply, conversion, distribution as well as transmission constraints. Following are the most significant signals that explain our forecast of the likely future developments in the Energy markets: On the demand side: Demand from institutional investors for assets providing hedges against unexpected inflation. Demand growth for energy products. The emergence of China and India as major commodity consumers with low energy-efficiencies leads to increased energy demand sensitivities. Low price-elasticity in developed markets, resulting in little demand destruction through price increases. Limited number of substitutes and underdeveloped alternative sources of energy. A weaker US Dollar, supporting global demand by making international purchases relatively cheaper. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 3
  • 5. Long-Term Energy Returns A Structural Approach to Deriving Energy CommodityApproach Main Factors Driving Our Energy Commodity Markets Forecast On the supply side: • Lack of marginal capacity of production in the Energy complex which affects the short-term supply/demand equilibrium. • Limited incremental supply and distribution capacity due to past under-investments across the energy complex (Lack of oil and gas exploration and R&D expenses, under-investments in global refinery capacity and distribution channels). • Long-term supply is essentially a lagged response future price signals. High marginal costs of production require high future price levels to provide incentives to commit firms’ capital to volatile long-term investments. Market derived signals: The current contango in the NYMEX WTI, Gasoline, Heating Oil and IPE Brent and Gasoil forward curves supports our assumption of price appreciation in the short run and substantial roll-yield in the longer run. Other factors: Migration of speculative and institutional capital into the complex, heightened geopolitical risks, vulnerability of oil infrastructure leading to potential supply disruptions, lack of transparency resulting in market price manipulation. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 4
  • 6. Long-Term Industrial Metal Returns Main Significant FactorsApproach Main Factors Driving Our Industrial Metals Commodity Markets Forecast Most significant signals in the likely future developments in the Industrial Metal markets: On the demand side: Strong relative demand growth for Base Metal products. The emergence of China and India as major consumers of Base Metals increased Base Metals demand sensitivities. (Massive investments in local infrastructure). Lack of price-elasticity, negligible demand destruction through price increases Limited number or lack of substitutes for Base and Precious Metals. A weaker US Dollar, supporting global demand by making international purchases relatively cheaper. On the supply side: Lack of marginal production capacity in the short-term in the Base Metals complex (Aluminum, Copper, Zinc, Nickel). Depleted inventories (Copper, Nickel). Limited incremental supply and distribution capacity due to past under-investments across the Base Metals complex (Depleted mines, lack of specialized labor, limited dry freight capacity). Upward cost pressures from labor demands and rising input prices. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 5
  • 7. Rationale for Investing in Commodities A Holistic Portfolio-Level Approach Clustering helps define groups of assets with high intra-group and low inter-group dependencies Grouping asset classes helps reveal the main LESS CORRELATED LESS CORRELATED sources of diversification Maximum portfolio diversification requires 1 incorporating strategies at both ends of 0.9 the spectrum 0.8 Commodities offer maximum distances correlation distances 0.7 resulting in greatest diversification 0.6 Caveat 0.5 Commodities may not provide attractive 0.4 alpha in all cycles (contango in commodity 0.3 markets and negative roll-yield) 0.2 Investing in commodities entails high 0.1 volatility and more importantly drawdown risk 0 Portfolio U.S. Inflation U.S. Small Cap Unhedged U.S. Bonds Real Estate U.S. Cash Commodity GS Commodity U.S. Large 60/40 Portfolio U.S. Mid Cap Emerging 60/40 Markets DJ-AIG EAFE CapSource: Q.M.S Advisors, Ibbotson, Matlab. Dendrogram based on unadjusted monthly total returns from January 1991 to December 2008. Hierarchical cluster tree based on average correlation matrix distances Commodities Offer Attractive Returns and Potent Diversification Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 6
  • 8. Rationale for Investing in Commodities A Holistic Portfolio-Level ApproachRationale Allow for diversification at two levels At the “beta” level, commodities offer fundamentally different market dynamics. Commodities offer an opportunity to gain exposure to “real assets”, driven by supply and demand imbalances At the “alpha” level, commodities allow for a flexible and efficient use of capital: • Gain exposure to alpha by actively managing the roll of the underlying contracts • Generate incremental returns from collateral redeployed in other investment vehicles • Profit from trading opportunities across commodities by implementing tactical shifts Offer overall no correlation to traditional 60/40 portfolio returns Due to low correlations, 60/40 portfolios and commodities did not generate extreme negative values simultaneously. Periods of large negative portfolio deviations (-2s) were accompanied by slightly negative average monthly commodity returns Caveat Investing in commodities should be viewed as a long-term investment to mitigate significant volatility and drawdown risk Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 7
  • 9. Rationale for Investing in Commodities Breakeven Analysis – Optimal Allocation to CommoditiesExpected Returns Required On Commodities For Inclusion In The Current Portfolio At Present Risk Level. 12 Efficient Allocation to Commodities with current 10 portfolio allocation 8 Expected Return (%) Expected Return on Current Portfolio 6 4 2 0 0 5 10 15 20 25 30 Allocation to Commodities (% of total portfolio)Source: Q.M.S Advisors, Ibbotson. Based on current 60% Fixed Income 40% Equity portfolio. Analysis based on Q.M.S Advisors’ Asset Class Assumptions.These materials do not contain any recommendation to buy or sell or a solicitation of an offer to buy or sell any securities or investment services. Credit Suisse Asset Management, LLC provides no determination of suitability or assurances orguarantees regarding the performance of any investment or investment strategy. You are responsible for conducting your own independent investigation and analysis, taking into account your particular circumstances, before deciding upon aparticular investment or investment strategy. Investments in certain asset classes, including hedge funds, carry significant additional risks that you should consider prior to investment. You accept complete responsibility for any investmentdecisions you may make as a result of your use of this material. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 8

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