Key Themes For 2011 Preview

Key Themes For 2011 Preview : We believe that many of the themes that we have been highlighting in 2010 will continue to play out in 2011. In this article, we build on some of our existing views and add some new ones on how commodity markets will evolve over the next 12 months. In sum, we believe that commodity prices will remain elevated over the course of 2011 with cyclical commodities such as base metals potentially outperforming.

We also see trade policy as a potential risk to supply, particularly with regard to grains if staple food prices remain high in emerging markets. Lastly, we believe that supply and demand dynamics will increasingly come to the fore which will see correlations between industrial commodities and equity markets weaken somewhat.

Theme 1: Commodities Will Head Higher, But Risks Remain

On the whole, we believe that commodity markets will offer a positive return to investors over the course of 2011. Of course, there may be particular commodities which post negative returns, but on the whole, we expect the CRB Index to average higher in 2011 than in 2010. This view is predicated on three main dynamics. First, inventory levels for a host of commodities remain low by historical standards and this, combined with a steady recovery in the global economy, suggests that several markets will remain tight.

This is particularly the case as major expansion projects for industrial metals were delayed due to liquidity problems in the capital markets over the 2008-2009 period. Second, we are seeing a strong recovery in demand in developed countries, most notably Germany and the US. Indeed, stronger-than-anticipated numbers in recent months suggests that we could have an upside surprise in terms of growth in these two economic powerhouses.

Stronger growth in the West, combined with robust growth in emerging markets would be bullish commodities. Third, we believe that monetary policy will remain loose in the West, providing ample liquidity for risky assets such as commodities as well as potentially keeping the US dollar under pressure. Despite our bullish outlook, we identify two main risks going forward which could derail this view. First, while not our core view, high levels of inflation and aggressive monetary tightening in China would be a destabilizing force, which could send industrial commodities lower. Second, sovereign risks in the eurozone could yet provide a downside surprise. Read More emergingmarketsmonitor.com ... For the latest updates PRESS CTR + D or visit Stock Market news Today

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