Commodities

1. Synchronized global growthThe global economy is running at its fastest pace in seven years and nearly all countries are feeling the lift, with 86% of purchasing manager index components accelerating, indicating a broad-based expansion. In our view, synchronized global growth should stimulate additional demand growth for commodities.

15 Reasons to Take a Closer Look at Commodities

Having troughed in early 2016, the supply-led commodity market recovery is well underway, with many commodity markets now balanced or in deficit. Demand for most commodities improved meaningfully in 2017, adding support for higher prices, as the Bloomberg Commodity Index climbed for a second consecutive year. We believe a convergence of macro, fundamental and secular drivers are aligning, providing the foundation for higher commodity prices in 2018.

2. China hard landing risk has receded While China’s economic growth is expected to slow in 2018 and beyond, we believe it should remain at a more sustainable level that is positive for both commodity consumption and global economic stability. Upward GDP growth forecast revisions in 2017 and 2018 reflect the view of the government’s successful management of an orchestrated slowdown.

Percent of Global PMIs in Expansion (PMI > 50)

20%

40%

60%

80%

100%

1997 1999 2001 2003 2005 2007 201520132009 2011 2017

Evolution of Consensus China GDP Growth Forecasts

2012

2013

2014

2015

2016

2017

2018

6.5

7.0

7.5

8.0

8.5

9.0

9.5

After years of GDP downgrades...

...expectations for China's economy

are picking up

2011 20152013 2014 20162012 2017

At November 30, 2017. Source: Markit, Cohen & Steers.

Data quoted represents past performance, which is no guarantee of future results. The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector, based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. See page 7 for additional disclosures.

At November 30, 2017. Source: Consensus Economics, Cohen & Steers.

Data quoted represents past performance, which is no guarantee of future results. Each line represents the consensus GDP growth estimate for the given year as it changed over time. See page 7 for additional disclosures.

15 Reasons to Take a Closer Look at Commodities

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3. Commodities have historically performed well in periods of unexpected inflation...The market seems confident that inflation should remain low for the foreseeable future, leaving it vulnerable to a surprise. As global job growth continues, we believe upward pressure on wages could drive core inflation higher in 2018. Commodities have historically been one of the most effective ways to hedge against unexpected inflation.

4. ...and in rising-rate environments Rising interest rates typically reflect strong economic growth and rising wage and price inflation—an environment in which commodities have performed well, historically.

Annualized Performance of Commodities in Rising/Falling Treasury Rates 1991–2017

Average Returns (lhs)

Median Returns (lhs)

Sharpe Ratio (rhs)

-4%

-2%

0%

2%

4%

6%

8%

10%

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

7.8 8.4

0.3

-5.2

Rising 10-Year Yield Falling 10-Year Yield

At November 30, 2017. Source: Thomson Reuters Datastream, Cohen & Steers.

Data quoted represents past performance, which is no guarantee of future results. See page 7 for index definitions and additional disclosures.

Average Annualized Total Returns in Excess of Cash Based on U.S. Output Gap Regime Since 1973(a)

U.S. Bonds

U.S. Equities

Commodities

4 Stages of the Business Cycle

9.85.1

-5.0

1.7

11.8

0.63.8

10.5 12.2

3.3

14.4

-10.1-10%

0%

10%

20%

Commodities are historically strongest in late-stage recovery (Expansion)

and early recession (Downturn)

Trough Recovery Expansion Downturn

At December 31, 2017. Source: Thomson Reuters Datastream, Cohen & Steers.

Data quoted represents past performance, which is no guarantee of future results. Analysis based on 6 full U.S. business cycles from 1973 to 2010, excluding the current partial cycle that began in 2010. See page 7 for index definitions and additional disclosures.

5. A late-cycle assetOn average, commodities have historically performed well toward the end of expansion cycles and in the early stages of recessions. While not a predictor of future returns, we believe this bodes well for commodities considering the U.S. economic expansion is entering its ninth year.

(a) The output gap is the difference between GDP growth and maximum potential GDP growth, in which companies and employees are operating at maximum efficiency. A negative output gap (Trough: negative/falling; Recovery: negative/rising) indicates an underperforming economy, whereas a positive output gap (Expansion: positive/rising; Downturn: positive/falling) indicates an outperforming economy.

Real Return by Quartile of Inflation Surprise1978–Q3 2017

U.S. Bonds

U.S. Equities

Commodities

-10%

0%

10%

20%

7.511.6

-11.6

5.6

13.3

0.85.1

9.5 9.4

-1.2

14.9

3.8

Quartile 1 Quartile 2 Quartile 3 Quartile 4

Average Inflation Surprise

-2.2% -0.6% 0.3% 2.0%

At September 30, 2017. Source: Cohen & Steers, Bloomberg.

Data quoted represents past performance, which is no guarantee of future results. Returns based on average monthly one-year rolling returns, grouped evenly into quartiles based on the difference between actual inflation (current-year Consumer Price Index) and expected inflation (year-ago University of Michigan Survey of Consumers, Expected Change in Prices During the Next Year). See page 7 for index definitions and additional disclosures.

3

6. At the sweet spot of the fundamental cycleThe commodities supply-led rebalance continues following the trough in early 2016. We believe many commodity markets are now balanced or in deficit and inventories are normalizing, suggesting they are in the rebalancing (phase 5) or tightening phase (phase 6)—the sweet spot in the cycle.

7. Oil rebalancing accelerated by OPEC/ non-OPEC production caps

OPEC and certain non-OPEC countries (primarily Russia) have adhered closely to their January 2017 agreement to limit supply, and recently extended it through the end of 2018. This coordinated effort to remove nearly 2 million barrels of oil production per day has helped accelerate the rebalancing of supply and demand, helping to normalize global inventories.

OPEC and Non-OPEC Crude Oil Production Thousands of Barrels Per Day

38,200

39,200

40,200

41,200

42,200

43,200

44,200

45,200

46,200

Agreement renewed through

Dec 2018

Original agreement took e�ect Jan 2017

2005 200820072006 2009 2010 2011 2012 2013 2014 2015 2016 2017

At November 30, 2017. Source: IEA, Bloomberg, Cohen & Steers estimates.

See page 7 for additional disclosures.

Fundamental Commodity Cycle

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 Phase 1

Normalization (from peak)

Rebalancing (from deficit)

Loosening Normalization (from trough)

Rebalancing (from surplus)

Tightening Normalization (from peak)

Supply deficit and high prices incentivize new production and discourage demand

Rising production and reduced demand cause prices to fall, returning

the supply-demand balance to equilibrium

Growing supply surplus, coupled with falling demand, increases

inventories and creates downward momentum

in prices

Oversupply and low prices incentivize production cuts and incremental demand growth

Falling production and rising demand lift prices, returning the

supply-demand balance to equilibrium

Demand outweighs supply, reducing inventories and creating upward

momentum in prices

Supply deficit and high prices incentivize new production and discourage demand

At December 31, 2017. Source: Cohen & Steers.

See page 7 for index definitions and additional disclosures.

1

2

3

4

6

5

1

BalancedMarket

BalancedMarket

Peak

Trough

Peak

Price

Where We Are Now

15 Reasons to Take a Closer Look at Commodities

4

8. China supply-side reform and environmental cuts could expedite metals rebalancing

China’s supply-side reform began in 2015 and has included the shuttering of illegal capacity, environmental capacity cuts, waste import bans, and emissions controls. These measures imposed by the government have restricted the supply of many commodities, including aluminum, zinc, copper and nickel, as well as many bulk commodities, and should continue to impact markets for years to come as policies are enacted to achieve the government’s targets.

9. Elevated geopolitical risksConflict and political uncertainty can often disrupt supply chains for raw materials while causing volatility in financial markets. With tensions escalating in many regions around the globe, owning commodities may be an effective way to defend against the effects of unexpected geopolitical events.

10. Commodities at historic lows vs. stocksCommodities are trading at their lowest price level relative to equities in over 25 years. We believe the current market environment offers a historic value-driven opportunity to increase or initiate an investment in commodities.

Hot Spots Around the Globe

At December 31, 2017.

See page 7 for additional disclosures.

Commodity Valuation Relative to U.S. Equities

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

+2 Std. Dev.

+1 Std. Dev.

Average

-1 Std. Dev.

-2 Std. Dev.

19941991 2000 200620031997 20122009 2015

At September 30, 2017. Source: Bloomberg.

Data quoted represents past performance, which is no guarantee of future results.See page 7 for index definitions and additional disclosures.

Supply-Side Reform Cut Estimates 2016–2020, Cumulative

% of China Production

% of Global Production

5%

10%

15%

20%

25%

10.9

21.0

5.1

10.0

6.0

19.0

3.3

8.7

CoalSteel Cement Aluminum

At November 30, 2017. Source: Morgan Stanley, Cohen & Steers. Based on 2015 capacity.

See page 7 for additional disclosures.

5

11. Back to backwardationBackwardation—when investors will pay more for a commodity now than for delivery in the future—has returned for many commodities, signaling tighter inventories and a return to positive roll yield. This could be a potential tailwind for commodities after years of detracting from investor returns.

12. Correlations are generally back to normal Years of global quantitative easing and sluggish growth have skewed recent correlations for many assets, including commodities. But with the gradual normalization of economic conditions, correlations are generally back to historical norms, reinforcing the diversification potential of a commodities allocation.

13. Secular demand trends remain in placeWhile rarely talked about since the onset of the commodities bear market in 2011, significant megatrends continue to evolve that should impact the consumption patterns of commodities for decades to come. These secular consumption-changing trends include population growth, urbanization, higher per-capita incomes and increased living standards.

World Urbanization as % of Total Population

More Developed Regions

China

Indonesia

India

Actual Projected20%

40%

60%

80%

100%

19601950 1980 200019901970 20202010 20402030 2050

At March 31, 2014. Source: UNdata.

More Developed Regions comprise Europe, Northern America, Australia/New Zealand and Japan. See page 7 for additional disclosures.

Six-Month Rolling CorrelationsJune 1991–September 2017, Daily Returns

Commodities vs. U.S. Equities

Commodities vs. U.S. Bonds

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

19931991 1997 200119991995 20052003 2009 2011 2013 20152007 2017

At September 30, 2017. Source: Bloomberg, Cohen & Steers.

Data quoted represents past performance, which is no guarantee of future results. U.S. equities represent price returns; commodities and U.S. bonds represent total returns. See page 7 for index definitions and additional disclosures.

Backwardation (+) / Contango (-): 1- to 13-Month Futures Strip Last Year ContangoBackwardation

-18%

-12%

-6%

0%

6%

12%

November 2017: November 2016:

155

Backwardation Contango1929

Cot

ton

Unl

eade

d G

asol

ine

Bren

t Cru

de

WTI

Cru

de O

il

Feed

er C

attle

Ric

e

UK

Nat

ural

Gas

Live

Cat

tle

Zinc

Gas

Oil

Hea

ting

Oil

Palla

dium

Lean

Hog

s

Iron

Ore

Lead

Soyb

ean

Oil

Soyb

ean

Mea

l

Gol

d

Coc

oa

Soyb

eans

Plat

inum

Nic

kel

Cop

per (

CO

MEX

)

Silve

r

Alum

inum

Robu

sta

Co�

ee

Suga

r

Ura

nium

Nat

ural

Gas

Euro

Whe

at

Arab

ica

Co�

ee

Cor

n

Whe

at

Kans

as W

heat

At November 30, 2017. Source: Bloomberg. See page 7 for additional disclosures.

15 Reasons to Take a Closer Look at Commodities

6

14. Electric vehicles—the newest megatrendWhile there is certainly debate around the trajectory and timing of electric vehicle adoption, the implications for commodity markets are likely to be profound. Bloomberg New Energy Finance estimates that we are on the cusp of exponential scaling in EV-related demand for industrial metals.

15. The Belt and Road Initiative could boost infrastructure investment significantlyThe Belt and Road Initiative is China’s vision for connecting the peoples of Asia, Oceana, Europe and Africa through a series of trade corridors and a maritime economic zone. The effort will require massive investment in infrastructure, which should increase demand for metals such as steel, iron ore and copper, as well as power sources such as natural gas, coal and oil.

ConclusionWe believe a more constructive macro and fundamental backdrop for commodities could drive a sustained recovery in prices, particularly as many investors are currently under-allocated to commodities. With inventories declining amid continued supply rationalization and accelerating demand, we see many reasons for a favorable outlook over the next several years.

China’s One Belt, One Road

CHINA

Xi’an

UrumqiAlmaty

BishkekSamarkand

DushanbeTehran

Istanbul

Moscow

Venice

Athens

Nairobi

Colombo

Kolkata

Hanoi

GuangzhouFuzhou

Jakarta

Kuala Lumpur

Rotterdam Duisburg

2013 20162011 20172014 201520122010

Silk Road Economic BeltMaritime Silk Road Initiative

At November 30, 2017. Source: Bloomberg New Energy Finance.

See page 7 for additional disclosures.

Global Metals and Materials Demand From EV Lithium-Ion BatteriesUnits: Thousand Metric Tons

Manganese

Cobalt

Lithium

Copper

Aluminum

Nickel

Graphite

500

1000

1500

2000

2500

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

At November 30, 2017. Source: Bloomberg New Energy Finance.

See page 7 for additional disclosures. 

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Index Definitions. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

Commodities—All except exhibit 4: Through July 1998: S&P GSCI Commodity Total Return Index, representing the global commodity market, measuring the returns accrued from investing in uncollateralized nearby commodity futures. After July 1998: Bloomberg Commodity Total Return index (BCOMTR), composed of futures contracts, reflecting the returns on a fully collateralized investment in the Bloomberg Commodity Index (BCOM), combining BCOM returns with the returns on cash collateral invested in 13-week (3-month) U.S. Treasury Bills. Exhibit 4: Bloomberg Commodity Index reflects commodity futures price movements, calculated on an excess return basis (excludes returns on cash collateral).

U.S. Bonds—All except exhibit 5: Barclays Capital U.S. Aggregate Bond Index, which covers the U.S. investment-grade fixed-rate bond market, including government and corporate securities, mortgage pass-through securities and asset-backed securities. Exhibit 5: Citigroup U.S. Treasury 7–10yr Maturity Total Return Index, which tracks the total return of U.S. Treasury bonds with maturities of 7–10 years.

U.S. Equities—All except exhibit 5: S&P 500 Index, an unmanaged index of large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance. Exhibit 5: Datastream United States Equities Total Return Index, a free-float-adjusted market-cap-weighted benchmark representing a sample of U.S. stocks covering a minimum 75–80% of total U.S. stock market capitalization.

Important Disclosures

Data quoted represents past performance, which is no guarantee of future results. This material is provided to certain qualified institutional and professional investors or their advisors only for informational purposes and reflects prevailing conditions and our judgment as of this date, which are subject to change without notice. The views and opinions in the preceding commentary are as of the date of publication and are subject to change without notice. It does not constitute investment advice or a recommendation or offer. We consider the information in this presentation to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated in this presentation will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast set forth in this presentation will be realized. The mention of specific commodities is not a recommendation or solicitation to buy, sell or hold any commodity interests. This is not an inducement to buy or sell commodity interests. Strategies and funds that trade in commodities involve a risk of loss. Investors should consider whether such services or products are suitable for investors.

Cohen & Steers Capital Management, Inc. (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds.

Cohen & Steers claims compliance with the Global Investment Performance Standards (GIPS®).

Cohen & Steers UK Limited is authorized and regulated by the Financial Conduct Authority (FRN 458459). Cohen & Steers Japan, LLC, is a registered financial instruments operator (investment advisory and agency business with the Financial Services Agency of Japan and the Kanto Local Finance Bureau No. 2857) and is a member of the Japan Investment Advisers Association.

About Cohen & Steers

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