We have a negative outlook for commodity markets in the fourth quarter.
Historically, oil markets have moved up on the news of increased geopolitical tension in the Middle East. However, over the past several months, we have seen the opposite happen. Oil markets have sold off even as headlines highlighted expanding conflict in Syria and Iraq.
In the face of this tension, three factors — an increasingly energy-independent United States, a stronger dollar, and a weakening Chinese economy — have all served to drive commodity prices even lower. We believe that trend will continue.
With regard to portfolio construction, we continue to a see a decline in the correlation between commodity and equity markets. In the future, this could make commodities an attractive asset class in terms of the diversification benefits for reducing overall portfolio risk.
However, given our current negative outlook for the direction of these markets, we do not believe this is the time to add to commodity allocations.
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For informational purposes only. Not an investment recommendation.
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Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.