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Commodities upgraded to a small overweight
Author: Henk Luijten
Henk Luijten joined ING Investment Management (ING IM) in July 2000. As one of the financial editors of Investment Content Management (division of Marketing & Communications), he is responsible for the written communication of ING IM’s investment views and expertise to client servicing departments, ING Private Banking and to various client groups directly. He does so by writing a wide range of publications. Prior to joining ING IM, Henk worked as an editor and an investment analyst for MeesPierson and as a credit analyst for ABN Amro. Henk holds a Master degree (Law, Amsterdam, 1980) and a Bachelor degree (economics, Hogeschool Limburg, 1972).
As already known, in the first week of 2012 we took more risk in our tactical asset allocation by upgrading equities (see Marketexpress of 9 January 2012) and commodities to small overweight positions. In this Marketexpress we describe in rough outline our views on commodities within a global context. The reasons why we decided to take somewhat more risk are largely determined by somewhat positive changes in the situation in the Eurozone as well as in the global cycle.
It must be said that the ECB has become more pro-active, pre-emptive and flexible under its new President Draghi compared to his predecessor. The refi rate has been lowered relatively quickly at a time when the deterioration in growth momentum was mostly visible in the survey data and had not yet fully filtered through in the hard data.
Commodities & Equities in 2011 and 2012
Source: Thomson Reuters Datastream, ING IM (31/12/2010 – 17/01/2012)
In contrast with Europe, the economic environment elsewhere in the world improved. US PMI (purchasing manager’s index) manufacturing data continue to show pent-up demand in the industrial sector with the gap between new orders and inventories widening further in December. In China, both the manufacturing and the services PMI’s recovered in December above the 50-level, signalling that the economy is growing again. Having said this, fixed-asset investment growth was lower than expected. Particularly important is the sharp decline in real estate investment growth, the main driver of Chinese economic growth of the past years. In the next few months, we expect further monetary easing and probably more new initiatives to ease fiscal policy. Therefore, we think that the risk of a Chinese hard landing has somewhat receded. In addition, the PMI in the Indian manufacturing sector continued to improve (to 54.2) in December (from 51 in November). Apart from severe European contagion (not our base case!), the global economy is unlikely to decline strongly (global growth in 2012 will be approximately 3%).
Receding tail risks have increased the likelihood of our base case scenario. This is relatively constructive for commodities. With secular trends in emerging markets (urbanization, changing life style) still firmly in place and monetary policy that is expected to remain accommodative in developed markets and in easing (bias) mode in emerging markets, a continued volume effect in commodity demand is still expected to hit unabated commodity supply constraints.
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Senior Investment Specialist Ad van Tiggelen about Asset Allocation in October.