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As expected, the commodities sector performed relatively poorly against the broader market for most part of 2013, after we maintained our Underweight rating from 2012. While some of the commodity plays have staged a recovery in 2H13, we note that valuations are still looking pretty inexpensive. From this perspective, we upgrade our rating from Underweight to NEUTRAL. Although we do not see any stock that stands out at the moment, there may be some potential upgrades should there be an over-correction in the market on the back of the Fed tapering.
Recovery in late 2H13
As expected, the commodities sector performed relatively poorly against the broader market for most part of 2013, after we maintained our Underweight rating from 2012. Against the STI’s 0.4% showing until 6 Dec 2013, the commodities stocks under coverage fell by an average of 6%. They had also fallen by as much as 19% at their lowest versus the STI’s 6% slide before staging a recovery in late 2H13.
Developed economies slowly recovering
Part of the recovery was buoyed by news that economies are slowly recovering, led by the US. According to the IMF (International Monetary Fund) in its latest World Economic Outlook (WEO) report out in Oct, it now expects World Output to grow 3.6% in 2014, up slightly from the likely 2.9% growth in 2013. However, it warns that downside risks remain.
Slower Chinese economy may be a drag on commodities
Some of the “fresh” risks include slowing growth in China, which may affect many other economies, notably the commodity exporters among the emerging and developing economies. However, IMF believes slower near-term growth is a worth-while trade-off as there will be positive net effects in the longer term, which should lead to more stable demand for commodities.
Upgrade to NEUTRAL
While market sentiment may remain somewhat cautious until investors get a better handle on the magnitude and extent of the Fed tapering (widely expected to take place sooner rather than later), we believe that further signs of a firmer recovery in the US economy could lead investors to adopt a more “risk on” approach. And with the valuations of some of the commodity plays still looking relatively inexpensive, we could see potential upgrades for some of them if there is an over-correction in the market. Hence we also upgrade our rating from Underweight to NEUTRAL
Publish date: 10/12/13