Any remaining belief in the commodity super cycle is gone. There is no inflation to worry about so inflation diversification is a thing of the past. Investors now have to think about deflation as the key price risk. Emerging market growth has slowed. The new normal makes developed market growth two percent at best. The asset bubble in equities has not touched commodities where you have to use or convert raw product into something else. The story for buying commodities has disappeared and the same goes for investors. Another disappointing year is developing in commodities led by strong declines in grains and a strong trend lower in energy market prices.
The DJUBS commodity index is down 8% for the year. All major markets in the energy complex are all down. Most by double digits. Metals are down except for nickel, zinc, and aluminum. The grain markets have been strong declines based on significant harvests. The exception to the agricultural decline is coffee and cocoa. Livestock has been the only star sector but herds will be bigger by spring.
Commodities are an unloved asset class and the global outlook of weak growth is not going to help with extra demand. Rationalization will have to come from the supply side which usually takes time. Producers will have to drop out of the market. That said, commodities on a selected basis may offer better upside as markets adjust to lower levels. I hate to believe in the counter-trend trade when there is limited positive fundamentals, but the beat-up asset class always offers the best opportunities for taking an alternative position. Strategic allocation decisions are always best when markets have fallen.