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The above definition is only an extract and is not exhaustive. For further details please refer to the Glossary section of the FSA Handbook: http://fsahandbook.info/FSA/html/handbook/Glossary/P

 

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Lyxor UCITS compliant Exchange Traded Funds (Lyxor UCITS ETFs) referred to on this website are open ended mutual investment funds (i) established under the French law and approved by the Autorité des Marchés Financiers (the French Financial Markets Authority), or (ii) established under the Luxembourg law and approved by the Commission de Surveillance du Secteur Financier (the Luxembourg Financial Supervisory Committee). Most, if not all, of the protections provided by the Swedish regulatory system generally and for funds authorised in Sweden do not apply to these exchange traded funds (ETFs). In particular, investors should note that holdings in this product will not be covered by the provisions of the Financial Services Compensation Scheme, or by any similar scheme in France.

 

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However, most Lyxor UCITS ETFs follow synthetic replication process. This consists of entering into a derivative transaction (a ‘Performance Swap’, as defined below) with a counterparty that provides complete and effective exposure to its benchmark index. Lyxor has adopted this methodology in order to minimise tracking error, optimise transaction costs and reduce operational risks.

 

A Performance Swap is a contractual agreement which is negotiated over-the-counter (OTC) between two parties: the Lyxor UCITS ETF and its counterparty. From a risk perspective, each Performance Swap ranks equally with other senior unsecured obligations of the counterparty, such as common bonds (i.e., same rights to payments). In the Performance Swap, the counterparty of the Lyxor UCITS ETF commits to pay the Lyxor UCITS ETF a variable return based on a pre-determined benchmark index, instead of a fixed stream of income (as in bonds). At the same time, the counterparty will receive from the Lyxor UCITS ETF the performance and any related revenues generated by the basket's assets (excluding the value of the Performance Swap) held by the Lyxor UCITS ETF. Information provided on individual ETFs includes data on the basket relating to the ETF and the percentage value of the basket represented by each asset. The information is relevant to the closing values on the date given. 

 

Investment Risks

 

The Lyxor UCITS ETFs described on this website are not suitable for everyone. Investors' capital is at risk. Investors should not deal in this product unless they understand, having obtained independent professional advice where necessary, its nature, terms and conditions, and the extent of their exposure to risk. The value of the product can go down as well as up and can be subject to volatility due to factors such as price changes in the underlying instrument and interest rates. If a fund is quoted in a different currency to the index, currency risks exist.

 

Prior to any investment in any Lyxor UCITS ETF, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us. We recommend that you consult your own independent professional advisors (including legal, tax, financial or accounting advisors, as appropriate).

 

Specific Risks

 

·         Capital at Risk. ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Benchmark Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested. Investments are not covered by the provisions of the Financial Services Compensation Scheme (“FSCS”), or any similar scheme.

·         Counterparty Risk. Investors may be exposed to risks resulting from the use of an OTC Swap with Societe Generale. Physical ETFs may have Counterparty Risk resulting from the use of a Securities Lending Programme.

·         Currency Risk. ETFs may be exposed to currency risk if the ETF or Benchmark Index holdings are denominated in a currency different to that of the Benchmark Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

·         Replication Risk. ETFs are designed to replicate the performance of the Benchmark Index. Unexpected events relating to the constituents of the Benchmark Index may impact the Index provider’s ability to calculate the Benchmark Index, which may affect the ETF’s ability to replicate the Benchmark Index efficiently. This may create Tracking Error in the ETF.

·         Underlying Risk. The Benchmark Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Benchmark Index is calculated with reference to commodity futures contracts which can expose investors to risks related to the cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

·         Liquidity Risk. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Benchmark Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other Market Maker systems; or an abnormal trading situation or event. 

 

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09 Jul 2021

A commodities supercycle: what it means and why it matters.

text

As the prices of oil, iron ore and copper have surged in recent months, there’s been much talk about a commodities supercycle. But what does this mean, and why does it matter? Jean-Baptiste Berthon, Senior Cross-Asset Strategist at Lyxor Asset Management, gives us an overview, and highlights the key role of copper in the energy transition.

In a regular commodity cycle, prices rise with demand. Commodity producers increase production until supply outstrips demand, and prices then fall back. In a supercycle, however, supply fails to meet demand for a prolonged period, so that commodity prices continue to rise for years or even decades. 

What stops supply from meeting demand? Well, companies need time to build the capacity to mine more metals or extract more oil. And they need more time still to hire and train workers. This can take years. So when demand rises more sharply than producers have anticipated, they can struggle to catch up. That’s when a supercycle can set in.

A century in supercycles

Historically, supercycles have arisen from profound changes in the way we live – changes that drastically increase our appetite for commodities. In the past 120 years, there have been four such supercycles.

The first began in the 1890s as US industrialisation got underway. This supercycle continued through to the end of the First World War, fuelled by demand for armaments.

The second started in the 1930s and persisted until the 1950s. It was driven by the widespread adoption of the motorcar and by the Second World War. 

The third ran from the late 1960s until the early 1980s. It accelerated in the 1970s as tensions in the Middle East interrupted the oil supply. Eventually, however, alternative sources of energy led to the 1980s oil glut.

The most recent supercycle began when China entered the World Trade Organisation in 2001. China’s economic reforms and massive urbanisation drove demand for commodities to new highs. In 2008, the global financial crisis brought this to an abrupt halt. 

Supercycles in commodity prices (BCPI weights,* 1899-2016)

Supercycles

Source for data: Bank of Canada. *Economists at the Bank of Canada used the Bank of Canada commodity price index (BCPI) to search for evidence of super cycles using an asymmetric band pass filter. This is an index of the spot or transaction prices in US dollars of 26 commodities. Original chart comes from Visual Capitalist: https://www.visualcapitalist.com/what-is-a-commodity-super-cycle/
Past performance is not a reliable indicator of future results.

Where to now?

Could we be in the early stages of a new supercycle? There are some signs that we might be. This time, the profound changes could be the Covid crisis and the energy transition. As oil and metal prices have rocketed in recent months, producers have struggled to meet demand. Many cut their capacity in response to the US-China trade war and the Covid pandemic, and there has been little investment in new capacity.

And demand is set to rise further still. As Covid-19 vaccines are rolled out, economies are reopening. Governments have announced massive fiscal stimulus programmes, and central banks are keeping interest rates at or near zero. Low rates can help to fuel a commodities boom as people invest in commodities – notably gold – to achieve higher returns and escape inflation. Meanwhile, the US dollar has weakened recently. Because commodities are traded in dollars, a weaker dollar can stoke demand.

Is it different this time? 

If a supercycle does get underway, it’s likely to differ somewhat from its predecessors. That’s because much of the world’s planned fiscal stimulus has a distinctly green tinge. President Biden’s American Jobs Plan includes investment of $174 billion in electric vehicles, alongside commitments to clean energy and green infrastructure. The European Union has announced the biggest-ever green stimulus package at over €500 billion while the UK has committed to ‘build back better’. And China has announced ambitious carbon-emission targets for the decades ahead. 

if a supercycle

This emphasis on the energy transition means that any nascent supercycle is likely to be driven by copper rather than fossil fuels. The price of copper hit a record high in May. Copper is used in both traditional and green infrastructure. It also has a crucial role in the manufacture of electric vehicles.

We expect a copper shortage later this year. The current surge has been driven by demand from China and exacerbated by Covid-driven disruption at mines in Chile and Peru. Although Chinese demand will probably moderate, the rest of the world should take up the slack. So the copper price looks set for fresh highs.

Historical performance of copper (in $)

historical performance

Source: Lyxor International Asset Management, June 2021. Past performance is not a reliable indicator of future results.

The prices of oil and natural gas have risen dramatically too. The OPEC+ group has started to reverse its recent production cuts, but any new supply is likely to be absorbed fairly quickly. Meanwhile, US shale gas has only just turned profitable after years of losses, so cautious producers are keeping capacity unchanged.

The emphasis on clean energy in the various stimulus packages will not have an immediate impact on demand for fossil fuels; traditional energy is required to build green infrastructure. But the long-term implications are less clear. 

What does a supercycle mean for investors? 

Rising commodity prices signal one big thing: inflation. A boom in commodities will, sooner or later, lead to rising prices across the board. That’s bad news for bondholders; most fixed-income products don’t offer protection from inflation.

Then there’s the stock market. Previous supercycles have begun when commodity prices are low and stock prices high – precisely the conditions when the current surge in commodities began. Stocks are still trading at record levels, but that could also suggest that a supercycle is on the cards. Past supercycles have coincided with shares falling from their highs.

But not all stocks are equal. The share prices of materials and energy companies could do very well if a supercycle sets in. And other cyclical stocks could benefit from a commodities boom.

The case against

There are, however, some factors that could prevent a supercycle from taking hold. If China’s growth rate slows significantly, global demand for commodities would moderate too.

Technology is another wild card. Improvements in energy efficiency could reduce demand for fossil fuels. And so too could improved recycling and greater industrial digitalisation.

Finally, if the Biden administration is unable to implement its stimulus packages in full, we may not see a commodities boom on the scale that many expect.

If the events of 2020 taught us anything, it’s that our powers of prediction are limited. So a new commodities supercycle isn’t a certainty. But it is a distinct possibility – one that investors should take seriously when they think about how their portfolios are positioned. 

Relevant Lyxor ETFs

Risk Warning

This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com.

Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Research disclaimer

Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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