Given our relatively pessimistic outlook for commodities, we have favored a modest underweight stance for this asset class.
Commodities generally behave with more momentum than reversion, and entered the current quarter coming off a very weak second quarter. Beyond the negative momentum, the weakness in emerging markets represents a very problematic signal for commodities.
While the outlook might be negative, there are two major sources of upside risk. Geopolitical concerns are at a high point in the Middle East, with political tensions in Egypt and continued strife in Syria. Egypt represents a risk above and beyond the general area's instability, as any disruption to the Suez Canal has the potential to cause a supply shock for energy markets.
The other source of upside risk for commodities is the continued correlation with equity markets. While they have fallen from recent highs, the strong correlations suggest that commodities could outperform as an asset class in the event of a risk rally.
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.
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