Morgan Stanley Says Commodities Gains to Be Limited in 2012

Commodities show limited potential for gains in 2012 as the global economy slows and risk aversion boosts the dollar, according to Morgan Stanley.

A comprehensive solution to Europe’s debt crisis remains elusive, while economic indicators signal a slowdown and deleveraging and fiscal austerity should impair growth, providing a “myriad of headwinds” for expansion, said analysts led by Hussein Allidina in a report.

Commodities had their worst quarter since 2008 in the three months to Sept. 30 on concern that Europe’s debt crisis was spreading, while 18 of 24 commodities tracked by the Standard & Poor’s GSCI Index dropped in November. JPMorgan Chase & Co., the biggest U.S. bank by assets, cut its recommendation on commodities to “underweight” on Nov. 22, while Goldman Sachs Group Inc. trimmed its forecast for gains in the next 12 months to 15 percent from 20 percent in a report Nov. 14.

“Upside for commodities as an asset class is likely limited given the fragile state of the OECD,” said Allidina, referring to the 34 economies in the Organization for Economic Cooperation and Development. “The non-OECD should continue to support global growth, but the pace is slowing.”

Morgan Stanley reiterated its call for gold as a top pick as investors seek a store of value and haven against debt risk and a slowing economy in Europe and the U.S. The bank expects bullion to average $2,200 an ounce next year. Spot gold, which rallied to an all-time high of $1,921.15 on Sept. 6 and traded at $1,707.69 at 5:38 p.m. in Singapore, is heading for an 11th annual gain. The bank also backed corn, soybeans and cattle as supplies may lag behind demand.

Goldman’s Call

While Goldman pared its 12-month forecast for returns on the S&P GSCI Enhanced Commodity Index this month, it kept a “neutral” call on commodities in three to six months, and an “overweight” recommendation over 12 months, as “global growth will provide enough support to demand to drive key commodity prices higher,” said analysts led by Jeffrey Currie.

Commodities are beating equities for a fifth consecutive year. While the MSCI All-Country World Index of equities has dropped 13 percent this year and yields on Treasuries fell to near-record lows, the S&P GSCI index rose 3.1 percent.

Raw materials are heading for a second monthly increase as crude oil in New York had a “non-fundamental adjustment,” Societe Generale SA’s commodity strategist Jeremy Friesen said in an interview yesterday. “Fundamentally, you can’t get really optimistic or really bullish about the commodity markets with current state of the world,” he said.

West Texas Crude

West Texas Intermediate futures rose 6.3 percent this month after plans were announced to reverse the direction of a pipeline to start shipping oil from the contract’s delivery point, easing a bottleneck that weighed on prices.

Expectations for a stronger dollar may provide an “additional headwind” for commodities, said Allidina. Dollar-denominated commodities tend to move inversely to the currency.

The Standard & Poor’s GSCI Total Return Index lost 12 percent in the three months to Sept. 30, the biggest drop since 2008, as the dollar rallied 5.7 percent against a six-currency basket including the euro.

“Historically, we have seen periods where both the U.S. dollar and commodities have rallied, owing to strength in the U.S. economy,” wrote Allidina. “Conversely, any dollar strength in 2012 is more likely to be a flight to quality. The implication for the global economic environment under such a scenario is a bearish signal for commodity demand.”

Commodity correlations with other risky assets, particularly equities, have been rising and are likely to continue as long as macroeconomic concerns linger, said Allidina. Increased volatility is likely to persist into 2012, he said.

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