What Slow Global Growth Means for Portfolios
The impact of slower global growth
Sluggish global growth and muted inflation continue to put pressure on commodity prices, particularly those most exposed to global growth, like prices for industrial metals and oil.
Market Realist – Commodity prices are likely to stay low as global growth slows.
Commodity (DBC) prices have been heading lower since 2011, and commodities have been the worst-performing asset class of 2015. The Bloomberg commodity index recently saw its worst quarterly decline in almost seven years. The index was down by ~15% in 3Q15.
The graph above shows the year-to-date performance of various GSCI commodity classes. The S&P Goldman Sachs Commodities Index (GSG) is down 18.8% YTD (year-to-date). Energy (IYE)(IXC) and industrial metals (DBB) have been the worst hit with declines of -20.0% and -24.4%, respectively. The industrial metals and energy commodities are more dependent on the global economy than the rest. The slowing global (ACWX) growth does not bode well for these commodities.
Earlier in this series, we attributed the slump in commodities prices to the slowdown in China (MCHI), which is a massive market for commodities. The slowdown has dragged some commodity-dependent economies into a recession.
Slower global growth is also associated with a severe drop in inflation expectations. Since most commodities are viewed as a hedge against inflation, the drop has led to a collapse in investor demand. The stronger dollar (UUP) only adds to their woes. The dollar and commodities have been exhibiting an inverse relationship.
As we saw in the first part, global growth is likely to slow down further. That being the case, commodity prices are likely to stay low.
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