Is the commodity bull run over?

By Justin G. Charbonneau | November 1, 2012 | Last updated on November 1, 2012
3 min read

The world has enjoyed a secular commodity boom for over a decade.

But we now find ourselves in a very slow growth world where commodities and cyclical sectors may not perform as well. Given the S&P/TSX Composite Index is now made up of 50% to 55% resource sectors, we can see why the market has been spinning its wheels, compared to the more defensive consumer sectors in the U.S. and other parts of the world.

Read: How to read the commodities market

Two of the biggest factors affecting Canada are our currency, and reliance on commodity prices for growth. Given the actions of many central bankers, we now find ourselves in a race to the bottom where waging a currency war is the name of the game, and the only way for the deleveraging countries to find a solution to their debt problems.

The other factors affecting Canada and its reliance on commodity prices have been the smartphone, and the fuel-efficiency standards the Obama administration has made law. Finally, given a mature commodity market, many of the wage cost pressures are beginning to hamper growth plans of Canadian companies.

So is the great commodity bull market coming to an end?

According to Ned Davis Research, commodity bull markets have, on average, lasted 16 years with a rise of 200% peak to trough. Taking the current bull market into context, we are now 13 years in, and ~170% higher from the 1999 trough.

Read: Is the bond bull market going bust?

From a risk management perspective, this should be a warning sign, It’s time to position portfolios accordingly to better manage risk and set clients up for the next decade. Try these asset allocation techniques.

Strategic Asset Allocation

  • Overweight Cash
  • Underweight Bonds
  • Neutral Canadian Equities
  • Overweight U.S. and Multinational Equities

Tactical Asset Allocation

  • Interest rates lower for longer and QE = corporate and high-yield bonds that offer risk/reward
  • Focus on dividend-yielding companies not tied to cyclical sectors
  • Underweight commodities, excluding natural gas
  • Exposure to the U.S. housing recovery and related stocks
  • Exposure to the North American automobile recovery and related stocks
  • Geographic, sector, and currency diversification are more important than ever, given the overvalued Canadian dollar

Diversification: Who needs it?

The thought of a lost decade in Canada is likely on nobody’s radar. But don’t forget the many risks to our economy. Also consider what’s happened in the U.S. and Europe housing and capital markets, which further adds to our risks.

Read: Is Canada headed for a U.S.-style meltdown?

One thing is certain, however: where diversification may have hurt you and your clients over the last decade, it may very well help generate higher returns, better manage downside risk, and most importantly, help avoid overexposure to assets correlated to Canadian real estate, which now looks set for a healthy correction.

Justin G. Charbonneau, CFA, DMS, FCSI is vice president and lead portfolio manager of Global Asset Allocation, Fixed Income, & Matco’s Balanced Fund at Matco Financial Inc., based in Calgary. @iHelpInvestCFA

Justin G. Charbonneau