- Stay long the commodity market (ETFs: GSG, DBC, and DJP; Futures: GI).
- The BUY rating was assigned at 556.43 on 10/05/2010.
- The BUY rating has already helped investors produce potential gains of 0.87% before leverage.
- Our target return is 23.24% before leverage.
We still favor being long the commodity composite.
The strength of the global economy is the most important factor for our expectation for rising prices of the commodity index. Demand for commodities in general is directly tied to underlying economic activity, and the basic economic backdrop in most major countries still looks good. Thanks to reasonable industrial activity figures, firm readings from earnings, and ongoing healing in the private sector, we think that the key decision for investors for the next twelve months is likely to involve backing the improvement. This has created a broadly friendly environment for risk assets, as investors become comfortable with the durability of the expansion. As a result, our investment strategists are constructive about the commodity index.
The global macro data remains our strongest anchor for near-term views. The PMI numbers in many major countries were notably strong again, in line with our robust growth forecasts. Confidence has also gained globally along with sales and profits. This means that manufacturing firms will begin expanding their capacity by adding new plant and equipment. At the same time, there have been some signs of life in the global labor markets and consumer sentiments. In addition, with statistics showing household income rising in the developed nations, we expect continued expansion of global industrial activity going forward.
The global economic growth will continue to put upward pressure on a number of commodities, including oil, metals, and major food crops, and demand is projected to outstrip easily available supplies over the next decade or so. In addition, earning trends and credit metrics will continue to improve based on our central views, supporting commodities and all risk assets. The commodity market is the star in the current stage of the cycle, which typically puts in a strong total return performance on a very broad basis. As a result, our findings here are bullish for the commodity index. We believe this is the optimal point in the cycle to be taking a long position on the asset.