Raw materials have had their worst first quarter in three years, with the Dow Jones-UBS Commodity Index down 1.1%. "It's a situation where supply caught up with demand," says Mark Luschini of Janney Montgomery Scott LLC. Output and stockpiles across this asset class have risen after years of supply squeezes.
In the meantime, the demand outlook isn't inspiring either (see below) and longer term, China, the main source of demand, is trying to re-orientate its economy away from commodity-heavy infrastructure investment towards consumption.
When it comes to agricultural commodities, we are more sanguine about the long-term outlook. The world's population is growing, emerging market consumers are eating more meat, and climate change and urbanisation are putting pressure on supplies of arable land. Fertiliser and food stocks are the best way to play this theme.
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Brent crude prices have been drifting sideways for almost three years now, with $111 a barrel in the middle of the range, and the supply and demand picture suggests that this will continue for some time, according to Barclays. The best bet in the energy complex is natural gas.
It is increasingly being used as an oil substitute as the jump in supplies from shale has made it cheaper. Logistics firms are converting fleets to run on gas and oil explorers are doing the same with drilling rigs. With demand gradually rising, historically low gas prices should head higher.
Investors should hold 10% of their portfolio in gold. It's an insurance policy against uncertainty and currency debasement, of which there is still far too much around. Cyprus is unlikely to be the last eurozone scare, while "low real interest rates, central bank buying and enhanced geopolitical uncertainty" are also bullish, notes Morgan Stanley. What about silver? When gold does well, silver tends to do even better. However, the reverse is also true. So this notoriously volatile commodity is only for investors with strong stomachs.
After a bull market that began in the early 1980s, when the West squeezed out the inflation that blighted the 1970s, government bonds have become expensive. Inflation is a grave danger to bonds as it erodes fixed incomes, and the odds of inflation rising significantly in the future have increased amid ongoing money printing.
With government debt having rocketed after the credit crisis, the temptation to inflate the debt away will be strong. The debt surge points to a jump in supply, which is being partly mopped up by central banks buying bonds through quantitative easing. This makes bonds a sell, while corporate and emerging market debt are both in incipient bubbles as investors desperately chase yield. Avoid.
February brought the largest drop in mortgage approvals for house purchases in a year. Affordability has fallen: earnings growth has slid and the cost of essentials keeps climbing, says Capital Economics. Moreover, house prices are still "very overvalued", so no wonder banks are being cautious.
Banks also remain undercapitalised and households over-indebted. Poor fundamentals are "outweighing government efforts to support the housing market". America and Germany are the best bets for property investors.
Worldwide, stocks rose in the first quarter. But the MSCI Emerging Market Index slid by 2.3%, its worst start to the year since 2008. And the outlook remains "challenging", says Socit Gnrale. Emerging markets flourish when the developing world and global growth are robust, but they aren't at present.
Barclays has trimmed forecasts for emerging market growth in 2013 by 0.2% to 5.3%. Asian companies are competing with a weakening yen. Brazil and India have disappointed, and data suggests "China's economy may not rebound as quickly as many had hoped", says the FT's Jamil Anderlini. Even if the authorities can help by allowing lending to rise again, this would imply a nastier credit crisis later.
As for the developed world, on which developing states still rely, it's hardly humming either. The latest manufacturing surveys point to "fairly lacklustre" global GDP growth of 3%, says Capital Economics. Europe's recession continues and Japan's recovery looks "anaemic". In comparison, the US economy "looks pretty decent", with the housing recovery and consumption accelerating.
This explains why the S&P 500 has hit a new record high while emerging markets are languishing. But the fundamentals hardly justify equities' buoyancy. It's due to the liquidity provided by central banks. A rally based on easy money is susceptible to nasty reversals if sentiment changes.
Investors should stick to Europe and Japan, both of which remain cheap, while the Bank of Japan's efforts to weaken the yen make the latter appealing. Any setbacks in these regions are buying opportunities. And while emerging markets will struggle for now, we still like India, Mexico and Indonesia.
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