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Ten Reasons to Get Overweight Commodities... Now - JPMorgan

July 1, 2013 9:16 AM EDT
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There's no way to sugarcoat it, commodities have been brutalized over the past few years given the slowdown around the world and specifically China, the lack of inflation and elevated supply. That however could change according to analysts at JPMorgan.

For the first time since September 2010, the firm is making an Overweight call on commodities.

JPMorgan analysts led by Colin Fenton say seasonal forces are reversing, supply channels are thinly stocked and sentiment is universally bearish.

"In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand," the analysts said. "Risk is now skewed toward demand growth surprise and production disappointment. WTI crude timespreads have broken out to the strongest levels in 6 years."

After turning underweight commodities in November 2011, over the past year the firm has grown more positive on the asset class, as energy has improved, expected menaces in bulks and metals have arrived, and sentiment across commodities has
belatedly soured. Now, the firm is recommending a net long, overweight exposure for institutional investors for the first time in more than two years, based on ten fundamental factors they quantify.

JPMorgan's ten reasons for going overweight commodity indices now:

1) Seasonal factors drove the 2Q correction in spot crude oil, and seasonal factors will reverse it.

2) Fresh demand for storable commodities, in response to the steep price corrections.

3) Price-driven, involuntary production cuts in crude oil, copper, and gold.

4) Inflation in production cost economics.

5) Spare capacity is tight and non-economic supply risks are rising.

6) Lagged benefits to commodity demand from rate cuts and other stimulative measures.

7) Stealth shift in US export policy already at work is further linking WTI with international prices.

6) Lagged benefits to commodity demand from rate cuts and other stimulative measures.

7) Stealth shift in US export policy already at work is further linking WTI with international prices.

8) Chinese shift in policy: ‘go green’ does not mean what it means in Seattle. It means go to oil&gas.

9) Stronger USD against what? The DXY does not include the CNY.

10) Global growth and inflation rates will likely soon bottom. Rising values in these rates, even from low bases, provide a favorable economic environment for commodity index total returns.

Commodities ETFs to consider on the JPMorgan call:

PowerShares DB Commodity Index Tracking Fund (NYSE: DBC)
iShares GSCI Commodity-Indexed Trust (NYSE: GSG)
United States Commodity Index Fund (NYSE: USCI)
United States Oil Fund, LP (NYSE: USO)


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