Roubini directs clients to cut commodities exposure

Roubini Global Economics, a major investment advisory firm, told clients on Thursday they should take profits from commodities markets, cutting exposure to raw goods to neutral from overweight, the firm's head commodities strategist told Reuters.

In a note to clients, the New York-based consultant to hedge funds, private equity houses, sovereign wealth funds and other investors advised paring broad commodities exposure for the first time since at least mid-2010.

"We're seeing a number of signs, both locally and globally, that indicate holders of commodities indices should take profits for now," Roubini commodities strategist Shelley Goldberg said in a phone interview.

"We still think there is long-term upside in commodities and we're not saying go short, but for clients who are long we're recommend taking profits and waiting."

Roubini Global's call comes as markets posted one of their largest one-day sell-offs in years. The firm had previously recommended being overweight commodities indices. Several commodities had surged to multi-year highs in April.

The CRB index of 19 major commodities plunged 4.9% on Thursday and Brent crude oil posted its largest one-day drop in dollar terms ever, falling by more than USD 12 a barrel.

Beginning in 2005, the New York-based firm's founder, economist Nouriel Roubini, predicted that a US housing bubble would trigger a major economic recession. By 2008, the US economy had fallen into its worst tailspin since the Great Depression.

Roubini is joining some major Wall St. banks in recommending a cut in commodities exposure. Goldman Sachs told its clients to pare back starting last month. Morgan Stanley has remained more bullish.

Goldberg said several factors are driving a commodities sell-off. Among them are weakening US economic indicators, seasonal selling that is typical in May, looming eurozone debt troubles that could hit demand for raw goods, monetary tightening and inflation concerns in emerging markets including China, and a general slowdown in economic growth rates across emerging markets, from double to single-digit growth.

Goldberg also cited the growing role of exchange-traded funds (ETF) and large systematic traders in commodities markets, which she said tends to exacerbate bearish selling streaks once a sharp market downturn has already begun.

Large algorithmic traders, Goldberg said, typically weight their portfolios to 25% commodities or more, and their computer models often direct wide-scale selling when markets start to fall sharply.

"When the trend is down, they will sell further," Goldberg said of "algo" traders with commodities exposure.

She added that large brokerage firms say they are witnessing "huge arbitrage unwinds," and profit taking among commodities investors.

Oil's sharp fall comes amid indications that high prices are already prompting demand destruction. The United States exported 54,000 barrels more oil products than it imported in February, Goldberg said, a sign of flagging demand in the world's top oil consumer.

But Goldberg forecast that the commodities asset class is likely to recover and eventually climb higher following a temporary correction.

"We think this is an intermission and not game over," Goldberg said. "Emerging markets growth is still strong and US monetary easing policies will continue to lift marginal costs of (commodities) production."