COMMODITIES OUTLOOK
4) Supply growth will be more challenging this cycle.
5) A stronger USD could be a headwind for commodities. Not
only are many of these
themes critical to our outlook, but most are a stark reversal of the trends during the 2000s.
GDP Growth Improving, But Composition Shifting 2013 ended on a positive note with year-end
data and surveys showing an upswing in global trade, manufacturing, and other growth catalysts. Our economists are also upbeat on global GDP growth for 2014 (3.4%) and believe growth will centre around three structural stories: DM acceleration, EM stabilization and central bank accommodation. The DM should contribute more meaningfully to global GDP with 1.8% growth in the G10 (up from 1.1% in 2013). However, our economists see challenges and rebalancing in the emerging markets (EM). EM GDP is expected to grow 5%, up only modestly from 2013, due to country-specific structural challenges. Morgan Stanley rates strategists see continued accommodation in DM and tightening in EM. The Fed will likely continue to taper QE while maintaining a low rate environment. The ECB and BoJ are both expected to provide more accommodation to prevent a backslide. Meanwhile, 13 central banks in EM, including Brazil and India, are slated to hike rates in 2014. The inflation gap between EM and DM should
in line with 2013. Taken as a whole, 2014 could be viewed as part of a “disinflationary growth cycle”, in which global growth gradually accelerates while DM inflation is surprisingly muted.
Too Early in the Cycle to Overweight Commodities The improved outlook for 2014 offers some hope for commodities, but probably not enough to
overcome cyclical headwinds. Part of the
recent under-performance in commodities can be attributed to anaemic demand growth since 2008. Without solid demand growth, commodities have been overly reliant on supply constraints to drive price appreciation. As supply constraints ease across
The inherent nature of the asset class provides some diversification, alternative factor exposure and tactical allocation opportunities ...
much of the space, notably in agriculture, demand will be all the more critical to price performance. While global GDP growth is expected to reach its highest level since 2011, Morgan Stanley’s 3.4% 2014 forecast is a far cry from the robust 4-5% GDP trend of the mid-2000s. Moreover, faster DM growth is not a replacement for slower EM growth given the lower commodity-intensity of GDP growth in the region. Commodities tend to outperform in the late
widen in 2014 as well. Our global economists expect DM inflation to remain subdued. In particular, they see G-10 inflation averaging 1.5-1.6% through 2015 – a challenge for commodity price performance. In the EM, 5% inflation is Morgan Stanley’s base case,
Even Excluding the “Super-Cycle” Cyclical Characteristics Still Hold
(Annualized average monthly total return by cycle minus S&P 500 total return index, Oct 1986 - Dec 2004, %)
50% 100% 150%
-100% -50% 0%
Expansion (Early)
Expansion (Late)
SPGCCI TR (Commodities) SPGCGR TR (Grains)
SPGCIN TR (Base Metals)
Recession (Early)
Recession (Late)
SPGCEN TR (Energy) SPGCLV TR (Livestock)
SPGCPM TR (Precious Metals) Sources: NBER, Bloomberg, Morgan Stanley Economics, Morgan Stanley Commodity Research March 2014 11
20% 40% 60%
-80% -60% -40% -20% 0%
expansion phase. As physical assets, commodities respond to the current environment while equities price off future expectations. As the cycle matures, this dynamic causes equities to discount slowing EPS growth and inflation pressures, while commodities continue to benefit from rising demand (and supply constraints) until growth actually turns
Commodities Have Continued to Follow the Playbook Since 2005
(S&P GSCI total return and S&P 500 total return, Jan 2005 – Sep 2013, %)
Late Expansion Early Recession Late Recession
Early Expansion
Commodities
S&P 500
Jan-05 Jun-05 Nov-05 Apr-06
Sep-06 Feb-07 Jul-07
Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
Sep-11 Feb-12 Jul-12
Dec-12 May-13
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