Early Monday morning, March 5, global risk assets teetered on the brink of a correction after the news from China that Premier Wen Jiabao had cut the domestic growth target from 8.0% to 7.5% during a speech at the National People’s Congress. Certainly the boom times in the year leading up to the 2008 Beijing Olympics are a distant memory, but I still expect China’s contribution to global GDP growth to remain a tailwind for global risk assets.
China GDP: 2011: 8.9% 2005: 9.9%
2010: 9.8% 2004: 9.5%
2009: 10.7% 2003: 9.9%
2008: 6.8% 2002: 8.1%
2007: 11.2% 2001: 6.6%
2006: 10.4% 2000: 7.3%
In the wake of China’s announcement, I expect investors need to focus on the commodity sector. Last week on CNBC I suggested that the time had come for select commodities to identify which of them can continue to appreciate. Now, however, further appreciation will be based solely on fundamental strength; paper asset demand is not enough. To that point, here is a simple breakdown of what I expect from the commodity space.
• Oil and its refined products (gasoline, diesel, heating oil) remain my favorite commodities investment with strong fundamentals. Over the past year, I have moved weightings between “overweight” and “market weight.” In either instance, allocations to the energy space remain mandatory.
• Precious metals should be investment vehicles NOT trading vehicles. To that point I am concerned with the price action in the precious metal space over the past week. Those that have dared to trade “PMs” face near-term vulnerability. I continue to offer – portfolios with allocations that mirror the jersey numbers of New York Yankee legends (4% to 8%) and consistent ownership of PMs will do better in the long run.
• Base metals. Both copper and aluminum prices have appreciated in 2012. The long-term fundamentals for copper are much stronger than for aluminum. However, given the current balanced inventory picture and year-to-date strength in copper, we await further easing from China before suggesting an increase to copper holdings. I am neutral on copper and aluminum.
• Soft commodities. Despite news from India that exports of cotton will be banned to insure domestic supplies the soft commodity space is well supplied. Coffee, sugar, cotton, and cocoa should not be the focal point for commodity investments at this time.
• Coal and steel holdings should continue to be held to a minimum; again, there is not enough global fundamental demand or M&A interest is present to increase holdings.
• The agriculture sector is my second favorite commodity investment. Historic global easing on the part of U.S., U.K., Japan, Europe, and China central banks will keep global agriculture prices strong for many more months. In addition, rising demand from the emerging world is favorable.
• Natural gas investments should be considered. Focus on non-dry gas plays. Focus on LNG and domestic natural gas producers that have proven by a diversified balance of oil and natural gas that they can withstand sub-$4 spot natural gas prices.