Commodities the best performing asset class

New research from Clerical Medical shows that Commodities were the top performing asset class in 2007 with an annual return of 20.6%. This is the first year since 2000 that Commodities have been the best performing asset class. Residential Property recorded the second highest rate of return in 2007 (10.7%).

Below average returns for the majority of asset classes

All asset classes, except Cash and Commodities, achieved returns below their long-term average during 2007. Equities, both domestic (+5.3%) and international (+5.2%), delivered their lowest returns in five years. Commercial Property saw its weakest returns (-5.5%) in fifteen years.

Residential property has provided the best returns over the past decade

Over the past decade, Residential Property provided the best returns, averaging 17.8% pa since 1997 (total return based on house price growth and implied rents).

THE PAST YEAR

COMMODITIES

Commodities were the top performing asset class, providing a 20.6% return as prices were boosted by strong demand from China and India.

Soyabeans see strongest price rise over the last year

Soyabeans were the strongest performing commodity in 2007 with a price increase of 77.5% as farmers in the US and elsewhere cut back production of the crop in order to grow more corn for the biofuels industry. Soft Red Wheat recorded the second highest price rise (69.2%), followed by Hard Wheat (68.3%). A drought in Australia, a major producer, has limited supply and boosted wheat prices.

Base metal prices fall

Zinc was the worst performing commodity, recording a 44.9% price fall followed by Nickel (-22.9%) and Aluminium (-17.3%) as the supply of these base metals has increased in response to earlier price rises.

Precious Metals

In contrast to base metals, Precious Metals performed well in 2007, providing investors with a return of 26.4% over the last year. Safe-haven flows into gold during the current financial market turmoil, along with increased demand for precious metals for both industrial uses and jewellery, have boosted prices.

Platinum outperforms other Precious Metals

The price of Platinum rose by 37.2% in 2007. This compared with a 31.8% increase in the price of Gold and a 14.4% rise in the price of Silver.

Gold price hits new record in early 2008

In early 2008, the price of Gold hit a new record high, rising above US$900 per ounce. Gold also performed well in 2007 with prices rising by 31.8% or US$202 per ounce to US$836, the biggest annual rise for 28 years. Demand for Gold from developing countries and diversification into commodities by investment funds has provided strong support to rising gold prices. Investors bought gold to safeguard the value of their investments against a backdrop of financial market uncertainty, rising oil prices and weakness in the dollar.

OTHER ASSET CLASSES

Residential property doubles the return from UK shares

Despite an easing in house price growth towards the end of 2007, Residential Property provided the highest return of any asset class apart from Commodities in 2007. The 10.7% return for Residential Property was more than double the return delivered by UK Shares (5.3%). This was the first time since 2004 that the returns from Residential Property have outperformed the UK stockmarket.

4Gold, silver and platinum as measured by the Reuters CRB precious metals index

UK shares outperform international shares

UK Shares, with a 5.3% return, marginally outperformed International Shares (+5.2%) in 2007, marking the fifth successive year of outperformance. Both UK and international shares, however, experienced a marked slowdown in growth from 2006 when they achieved returns of 16.8% and 16.1% respectively. Taking currency movements into account suggests a modest outperformance by international shares in 2007 for UK investors with Sterling falling 4.1% on a trade weighted basis, despite a 3.9% appreciation in 2007 against the US dollar.

Stocks outperformed bonds last year

UK Shares delivered a total return of 5.3% in 2007 compared with a 3.3% return from UK Bonds. Bond performance was weighed down by falling capital values in early 2007 caused by interest rates increases during the first half of the year. UK bonds underperformed UK stocks for the fifth successive year.

Cash perform better than bonds

The return from holding Cash last year was 6.0%. This was the second consecutive year that Cash has outperformed Bonds.

Commercial property delivers a negative return

UK Commercial Property (-5.5%) produced a negative return for the first time in 15 years in 2007. The total returns from Residential Property have outstripped Commercial Property in eight of the past ten years.

OVER THE PAST TEN YEARS

Residential Property is the best performing asset class over 10 years

Since 1997 Residential Property has delivered the highest returns, averaging 17.8% pa. Commercial Property (11.4% pa) was the next best performers. International Bonds (4.4% pa) produced the lowest returns over the past decade.

OVER THE PAST SIX MONTHS

Equities and Commercial Property weaken

Three asset classes recorded negative returns over the last six months of 2007; Commercial Property (-9.5%), International Shares (-3.0%) and UK Shares (-2.1%). Equity market weakness has continued into 2008 with domestic and international shares dropping by 8.7% and 8.4% respectively in January.

Martin Ellis, HBOS chief economist commented: "Recent market performance highlights the benefits of portfolio diversification. In 2007 commodities was the best performing asset class. Precious metals a category of commodities have performed very strongly over the last year. Gold is viewed as a store of value and a hedge against financial market uncertainty and inflation, which has helped to boost its price to record levels. Given the recent financial market turmoil, UK and international shares provided subdued returns in 2007, while UK residential property continued to be one of the best performers."