Falling commodity prices favor investments in developed countries over emerging markets during the first half of this year, according to a Wall Street analyst.
“Commodity turmoil is not over yet and it could still have major structural repercussions in these EM economies,” said Patrick Legland, global head of research at French bank Societe Generale. “We continue to favor developed market equities over commodity-exporting EM equity markets.”
Prices of goods including oil, copper and iron ore have declined significantly in the past four years as global economic growth has slowed, pressuring commodity exporters such as Australia, Brazil and South Africa. Oil traded in the U.S. has fallen more than 60 percent from a June high of about $107 barrel, while copper is down 8 percent this year to a five-year low.
“Over the past four years, many commodities have experienced sharp draw-downs (40 percent to 60 percent) from their peaks,” Legland said in a January 27 report obtained by MoneyNews. “With Japan and the euro zone still struggling to post meaningful growth, the lack of economic momentum remains a headwind for commodity-related assets in 2015.”
Once commodity prices find support, emerging markets may present opportunities to invest, he said.
“Over the long term, the impact of lower oil prices should be mostly positive for the global economy, but in the interim, it increases disinflationary pressures,” Legland said.
Fund managers have dramatically reduced their holdings of emerging-market equities, which may be a contrary positive indicator for investors, according to the Short Side of Long blog.
The website cites a Bank of America Merrill Lynch survey that shows fund managers are underweight in the emerging-market equities.
“While sentiment is not as negative as it was in March 2014 (31 percent underweight), it is still negative enough to indicate a possible bottom when compared to the 17 percent overweight exposure we saw in August 2014 (just before the sell-off),” the blog said. “Interestingly, just as hedge funds started to get bearish in recent weeks, the price is starting a rebounded from its well defined technical support level.”
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