Despite the major sell-off in commodities last June, there are a surprising number of experienced investors who are still structural bulls on commodities, while the commodity bears are feeling out-of-sync with the markets of late.
Regardless of whether one subscribes to Kondratiev wave theory (i.e., the long waves in economies and prices that are ostensibly inherent in the capitalist system) “super cycle” commodity moves, it is a matter of fact that basic materials/commodities stocks have been outperforming the major benchmark indices for several years now, with the sell-off in June of last year being primarily a brief interlude. Shares of companies that produce raw materials have surged 173% and energy stocks have appreciated 118% since October 2001, when commodity prices began rising. Moreover, the two groups have had the biggest gains in Morgan Stanley Capital International's World Index since then.
Yet global investors profess (in investor surveys) to be underweight basic materials, which, like the consensus bet against US equities, is looking a bit painful now. Anyone who bet on Japanese banks over basic material stocks because of the (theoretical) need for the BOJ to normalize interest rates has underperformed, while auto stocks will continue to suffer as long as investors fret about the US "goldilocks" scenario (although people investing in companies like Toyota appear to be trying their best to play down 2007 expectations to avoid any US political backlash).
On the other hand, we suspect that betting against commodities could continue to be harmful to your portfolio’s health, be it in Japanese equities or equities in essentially any other market.
Commodity/basic materials-related Japanese non-ferrous metals, shipping, construction equipment and trading companies are leading the Japanese market higher out of the February sell-off as they break out to the upside, just as they did after the June 2006 sell-off. Anyone not in these sectors/stocks can expect to continue underperforming the market indices for some time.