PORTFOLIO UPDATE – Global Resources
ommodities and commodity equities declined in April. Global economic data were weaker than expected, as it appears that most of Europe is back in a recession, and the emerging world and the US are slowing. Of the major economies, only Japan is positive, largely attributable to a weak yen. The Dow Jones-UBS Commodity Index was down 2.8% for the month and is down 3.9% year to date. Commodity related equities have been mixed, with energy-related stocks performing better, but mining equities underperforming.
Gold lost 7.5% in April and is down almost 12% year to date. It rebounded somewhat by the end of the month after a 13.7% drop from April 11-15. But the reputation of gold as a safe haven in times of global stress has been damaged. Gold remains a hedge against inflation and a play on US dollar weakness. However, we are in the exact opposite environment today. Global central bankers are using words like “deflation”, and the continuing debt issues in Europe are boosting the dollar at the expense of most currencies. We eliminated several gold stocks in April and early May as a result of the changing environment.
Economically sensitive base metals remain challenging. Copper declined 6.5%, aluminum lost 3%, and the average mining company lost over 7%. Newgate’s allocation to this sector remains small (approximately 10%). We recently sold coal stocks but have added slightly to diversified mining companies.
Oil was down globally, more so in Europe (down 7.8%) relative to the United States (down 3.8%). US oil production has increased significantly. In particular, the Bakken formation is now producing nearly 750,000 barrels per day, double its production of 18 months ago. Oil stocks did much better, with integrated oil and many equipment companies gaining during the month.
Cyclical stocks (including commodities) have been underperforming defensive stocks since the beginning of 2010. While cyclical stocks are undervalued by almost every measure, valuations on defensives are well above historical averages. Several major firms are now recommending that clients rebalance their portfolios in anticipation of a reversal of the three-year trend of defensive stocks outperforming.
Contributors to performance were:
- Energy related equipment stocks, integrated oil companies
- Chemical companies
Detractors from performance were:
- Mining stocks, both diversified and precious metals focused