Commodities Sector Research Report

by OCBC INVESTMENT RESEARCH (3 Dec)

COMMODITIES have gone through a roller-coaster ride in 2008 and are likely to fall victim to further volatility in 2009 along with the broad market. 2009 presents a challenging macro outlook. Moving into next year, we believe that several macro factors could continue to weigh on the sector's outlook.

These include the shaky global macroeconomic outlook, softening demand from manufacturers and consumers, a prolonged credit drought and falling commodities prices.

While the near-term outlook is likely to remain muted, coordinated government policies could help to stabilise the overall climate in the medium term. For instance, China has recently announced a four trillion yuan (S$888 billion) stimulus package and an interest rate cut to boost the cooling economy. Large-scale spending such as these will help to bolster the demand for commodities such as steel and energy, albeit in the further future.

Commodities have been proven to outperform the stock market in times of crisis. Nevertheless, as demand for commodities is a function of the global economy, we expect the sentiment for these stocks to recover only when macroeconomic pessimism fades. As such, we are NEUTRAL on the sector.

At current valuations, the risk-reward profile of some stocks has grown attractive for long-term investors who are prepared to ride out the volatility.

-Research Report by OCBC INVESTMENT RESEARCH (3 Dec)