Expectations of lower inflation is expected to reduce commodities’ appeal in 2012. Two of 2011’s strongest performing assets, gold and oil, are unlikely to replicate these returns in 2012. While supported by very low real interest rates, gold is likely to be held back by the U.S. dollar’s strength; however, an aggressive quantitative easing programme could provide a catalyst for a considerable move higher. Controlled supply should limit crude oil’s potential decline, according to Bill O’Neill, Chief Investment Officer for Europe, Middle East and Africa (EMEA) at Merrill Lynch Wealth Management.
“We do not preclude adding commodities exposure if China reflates sooner than we expect. Industrial metals such as copper would be notable beneficiaries,” says Mr O’Neill.
Three years on from the 2008-9 financial crisis, investors are once again confronted with deep discounts in the value of assets linked to this very atypical business cycle, says Mr O’Neill. “In 2012, despite shrinking opportunities for portfolio diversification, investors should focus on yield and quality, while aligning their portfolios to allow critical longer term growth themes to be captured.”
