27 January 2013

Commodity ETF 2013 Outlook


Increasing signs of improving global growth and continued strong central bank commitment to highly accommodative monetary policy indicates that the first part of next year has the potential to be a good one for cyclical and risky assets.
In this environment, commodities could perform well as an asset class, with more growth-sensitive commodities such as base metals and the white precious metals having the potential to perform most strongly.
Within equities, basic resources and mining companies could outperform. Commodity currencies such as the Australian, New Zealand and Canadian dollars may rise in this environment and, barring a major sovereign debt-related accident, the Euro should benefit. Conversely, funding currencies such as the Japanese yen and the US dollar may come under pressure.
The three key risks to this benign global scenario are a sharp rebound in sovereign risk in Europe – Greece and Spain in particular; the US fiscal cliff issue and possible US sovereign downgrade; and further political and military deterioration in the Middle East. Long gold, oil and volatility positions are potential hedges against these risks.
Global growth is recovering . . .
As we near the end of 2012 and look into 2013, there are increasing signs that the global economy is starting to recover.
While the recovery is uneven and there are a number of large potential tail risks that can derail it, lead indicators point to an upturn in the global economic cycle. Europe, particularly the periphery, has been left out so far, but the US and China, the two main engines of global growth, are now showing clear signs of recovery.
. . . and developed economy central banks are targeting higher asset prices
At the same time, the world’s major developed economy central banks are committed to maintaining low interest rates and providing extraordinary amounts of liquidity to the world’s financial system.
As the US Fed has made clear in its last two statements, the commitment to low interest rates and the provision of large and regular amounts of liquidity goes beyond short-term crisis prevention policy and will remain in place for a “considerable time” after the economic recovery strengthens.
This stated commitment, together with hints that additional liquidity will be provided in the new year as “operation twist” comes to an end, indicates that the Fed is actively encouraging investors to take more risk and trying to stimulate a sustained rise in asset prices.
Normally, an environment such as this – an upturn in the global economic cycle and highly accommodative monetary policy – would be strongly positive for cyclical and risk assets. However, so far, these types of assets have shown only muted performance, with sporadic sharp rallies often followed by equally sharp corrections.


Top commodities outlook 2013 NASDAQ


Copper: the perfect backdrop
A quick glance at a two-year price chart for copper implies a troubled supply/demand backdrop.
Indeed, the moribund U.S. construction market has crimped demand for copper-intensive plumbing, as is surely the case in Europe as well. Yet the demand picture should improve in 2013, as commercial and residential construction is expected to move higher in the United States. Equally important, global copper production isn't keeping up, so a range of metals analysts say demand will exceed supply in 2013, 2014 and beyond. In the next part of this series of articles, I'll take a closer look at the copper fundamentals, and the best ways to invest in this multi-purpose metal.
Silver shines anew
Thespot price for silver is also well below recent highs: It surged to $48 an ounce in the spring of 2011 when the global economy flashed signs of an upturn, though it has fallen more than 30% since then. Often pursued along with gold as a safe haven in potentially inflationary times, silver has the added charm of rising industrial use. An improving global economy, coupled with a fairly tight supply backdrop, should help silver -- and the companies and ETFs involved in silver-mining -- to post fresh gains in 2013.
The farm belt rebound
The epic drought of 2012 led to reduced U.S. farm incomes, and a resulting pullback in spending on a range of agricultural chemicals and equipment. Will the drought persist in 2013? It's hard to know, but we can pinpoint the supply/demand picture for various farming inputs, and few have such a positive backdrop as fertilizer. In a subsequent article in this series, I'll pinpoint the fertilizer stocks with the greatest potential upside in 2013.
The broad-based play
Even as I dig deeper into copper, silver and fertilizer stocks, there's a particular stock that shouldn't be ignored when talking about commodities. It mines a wide range of metals, has a strong set of assets and deep financial flexibility, and remains quite undervalued even after a recent sell-off.
I'm talking about Teck Resources ( TCK ) , which sports a $20 billionmarket value and $10 billion in annual sales. Thecompany is a low-cost producer of copper, zinc and coal. This means the company can generate profits even as rivals must shutter higher-priced mines.
The real reason to focus on this stock: The value of all its mines, if acquired piecemeal by another mining firm, then it would cost the equivalent of $65 a share, according to analysis conducted by Merrill Lynch. In effect, you can own this company'sasset base for roughly half of the private market value. In a consolidating industry, that's a clear positive.
How about oil?
Wondering where oil fits into the 2013 commodities outlook? Signals about oil's direction are mixed right now. Some industry analysts say the world is over-supplied with oil, so oil prices will sharply recede once tensions in the Middle East recede. But others say a stronger U.S. economy in 2013 could boost demand, pushing oil toward the $125 a barrel mark. We'll likely need to wait until next spring to get a clearer read on the direction of oil prices.
Risks to Consider: As noted earlier, China drives commodity prices, and any major slowdown in that economy would force commodity prices lower.

Action to Take --> Commodities have been out of favor for much of 2012, thanks to global macro-economic concerns. Yet as the United States, China, Brazil and other economies expand in 2013, and as funds flow out of bonds, commodities could be a major beneficiary.
Source: NASDAQ http://www.nasdaq.com/article/the-best-commodities-to-own-in-2013-cm200123#.UQVv3HwgGK0