Market Commentary: 13 May 2011

Commodities: Fizz to fizzle

During the early part of the year commodities such as oil and precious metals performed well on the back of concerns over political unrest in North Africa and the Middle East. The Japanese earthquake also added to a more buoyant outlook for raw materials as many analysts felt inventories would need to be replenished.

The positive view was not to last long, however, as weak economic data from the US and concerns over a Chinese economy - which will likely need to have the brakes applied - caused commodities to sell off in April.

Since the beginning of May we have seen a recovery of sorts, particularly in precious metals, where investors have used the sell off as a buying opportunity. While the economic picture in the US continues to signal slower than expected growth and inflation data in China points to the need for an increase in interest rates to cool the economy, we are unlikely to see a continuation of the commodity bull market. Base metal prices, such as copper, could well fall further through the summer.

Areas of possible exception are agricultural commodities, where the long term demographic picture combined with the potential for climatic impact, means that food stuffs and food supply stocks have the potential to perform well. Also, precious metals (whose price can appear an enigma) may continue to confound critics. Gold is now over $1,500 an ounce, and while some of this price is reflective of the weakening dollar, there are still plenty of commentators who talk of gold going north of $2,000 within a year.

In an inflationary environment, which UK investors find themselves in, long term exposure to commodities is desirable because of their link with headline rates of price appreciation (not to mention the fact that precious metals such as gold are historically a good store of value). However, for the next six months we can foresee a less benign outlook for the asset class.

Commodity prices are felt most keenly in emerging markets, so one beneficiary of lower commodity prices might be companies in emerging market economies. After a relatively weak 2011 therefore we could see emerging market equities begin to perform well again.

Balance and blend

A diversified approach to your investment strategy is generally recommended. And with the moving feast of markets and performances it's fairly obvious that you should keep a keen eye on where your money is invested and what assets are represented in your portfolio.

At Chartwell we provide access to a vast range of funds from which investors can structure their own portfolios. Investors can also select from one or more of our expertly blended model portfolios. Both approaches benefit from the exceptional discounts we've negotiated with leading fund management houses.