While the Fed’s upper hand had caused the U.S. equity markets to deliver stellar returns last year, 2014 has seen lackluster returns so far. The benchmark index S&P 500 had given us a nice 14% return last year by this time, a little less than five times the return S&P 500 has delivered so far this year. This clearly signals that we might not see equities delivering even close to the solid 32% return of 2013.
While the Fed hitting the taper chord certainly played the culprit, a severe winter, geopolitical tensions in Russia, slowdown concerns in China, emerging market turmoil and valuation concerns also took part of the blame.
Though a gradually improving U.S. economy, an accelerating job market and an assertion by the Fed chairwoman to keep interest rates low for the foreseeable future have certainly helped the U.S. markets to record new highs this year, the gains have been an uninspiring 3% so far.
However, one corner of the investment world that has seen some amazing returns this year is commodities. While equities ruled supreme last year, commodities are delivering spectacular returns this year (read: 3 Diversified ETFs to Watch in Q2).
Commodities underperformed last year as the emerging markets suffered an economic slowdown while supply conditions improved. This led many analysts to believe that the “supper cycle” of gains that the commodities witnessed in the past decade have indeed come to an end.
However, contrary to popular belief the broad agricultural commodity fund PowerShares DB Agriculture Fund (DBA) has gained more than 16% this year as against a meager 3% gain recorded by the popular large cap market ETF SPDR S&P 500 (SPY).
Dwindling supply conditions seems to be the primary factor for the surge so far. Though rising geopolitical tensions between Russia and Ukraine was a blessing in disguise for some commodities, extreme weather conditions in Brazil and some others parts of the world also played a key role in restricting supplies. These factors working in tandem have
boosted the prices of commodities this year.
What’s Up Next?
In fact, many market experts believe that this may just be the starting of the next commodities bull market. This is especially true given that commodities usually perform well during periods of rising global economic conditions. As most of the economists are calling for rising global GDP for this year and beyond, commodities prices will also be pushed up on higher consumption.
Moreover, weather forecasters predict that this year will see the most vengeful El Nino ever. The severe weather event could cause drought in some and flood in other key commodity producing regions. This is expected to cause havoc in the commodities markets ranging from cocoa to zinc.
Apart from the above factors, escalating tensions between Russia and Ukraine, and consequently chances of further sanctions on Russia have raised the risk of supply disruptions. Investors should note that Russia is one of the largest producers and exporters of oil and natural gas in the world, while Ukraine is among the top five exporters of corn and wheat. Thus these geo-political factors might also push commodities prices higher.
Additionally, commodities are witnessing declining correlation with equities, which is expected to provide better portfolio diversification. Given the above factors, commodities might continue with their remarkable performance going forward.
Below we have highlighted three ETFs which have seen the best returns in the
commodities space and have easily managed to beat the overall equity markets this year. Investors should keep a close eye on the below mentioned ETFs, which might continue to skyrocket if things continue to go in their favor.