jueves, 16 de enero de 2014

jueves, enero 16, 2014

Markets Insight

January 15, 2014 6:31 am

The only way is up for commodities


Confluence of factors suggests asset class due to turn round


Numerous factors suggest commodity prices are poised for a cyclical recovery this year.

First, commodities have underperformed in the past two years, restoring value to most. Also, artificial and temporary distortions keeping prices overextended have recently been eliminated.

The haven premium embedded in precious metals’ prices since the crisis of 2008 was dissolved in the past year, as demonstrated by the price of gold collapsing from almost $1,900 to about $1,200.

A year ago many agricultural commodity prices were temporarily boosted due to drought conditions that have subsequently reversed. The energy sector experienced a generational surge in pricing just before the contemporary recovery began, leaving it overextended

Most energy prices have been rangebound since 2010, though, restoring some value to this sector. Finally, industrial prices have cheapened considerably in the past two years, weakening once growth among emerging economies slowed.

Second, the biggest challenge facing commodity markets has been weak and spotty global economic growth. Within the US, real GDP growth seems likely to exceed 3 per cent this year and may rival the fastest growth of the economic recovery. Moreover, until recently, economies were either still in contraction (for example, Europe and Japan), experiencing a major recovery slowdown (emerging economies) or growing only slowly (US). Economic growth has strengthened nearly everywhere as we enter 2014, which should produce a better year for commodity investors.

Third, global economic activity has broadened and improved at a time when slack in the US resource markets has lessened. The unemployment rate recently dropped to 6.7 per cent and should near 6 per cent before the year is over. Moreover, the US capacity utilisation rate is set to rise above the 80 per cent level, which historically has been associated with cost-push pressures.

Fourth, as it has since last summer, the US dollar is likely to weaken further this year. A weak US currency directly pushes dollar-based commodity prices higher. It should also improve US exports, boost US manufacturing activity and thereby increase the domestic demand for commodities.

Fifth, indicators suggest money velocity (the rate at which the money supply is turned over via transactions) may rise this year, after declining throughout this recovery. Even though the Federal Reserve has started to taper its quantitative easing programme, should velocity unexpectedly rise it may not be able to taper fast enough to keep growth in the US money supply from accelerating. Moreover, should velocity climb for the first time in this recovery, concerns surrounding overheated economic growth and whether Fed policy was overdone are likely to emerge, and the commodity markets would be major beneficiaries of such fears.

Sixth, commodity prices are already showing some signs of bottoming. Since October, responding to better economic growth, industrial commodity prices have risen about 4 per cent. Indeed, the CRB raw industrial commodity price index recently reached its highest level since April. Moreover, the Baltic freight rate index (a measure of global rates charged to transport materials) has surged since last summer, suggesting international commerce in commodities is strengthening.

Even stocks point to an improvement in the commodity market. The S&P 500 materials sector stock price index has been outpacing the overall stock market since late summer. The relative price of the Dow Jones Transport Index (companies that haul commodities and materials) also just rose to its highest level since mid-2011.

Finally, most investment portfolios remain significantly underweight commodities. A consensus mostly concerned with deflationary potential and weak economic growth shows little interest in an asset class where prices have been on a downward trend for more than three years. Surely commodities in 2014 qualifies as a contrarian play. If the asset class surprises to the upside, many investors will be scrambling to establish at least some minimal position.

The commodity markets are unlikely to return to the secular advance made during the past decade. That era, tied mainly to the evolution of emerging world economies, is probably past. Rather, they simply represent a cyclical investment opportunity for 2014. At a minimum, investors should consider some allocation to commodities if only for diversification. However, a confluence of factors could make commodities one of the best performing asset classes this year.


James W. Paulsen is chief investment strategist at Wells Capital Management, a business of Wells Fargo Asset Management


Copyright The Financial Times Limited 2014.

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