We believe the supply and demand dynamics for commodities are unfavourable. The commodities supercycle was supported by unsustainable rates of growth and investment in China, encouraging producers to expand their capital expenditure and there now appears to be a supply and demand imbalance. Oil supply remains strong, with more being produced by non-Opec countries, to the extent that these nations have considered but refrained from cutting supply. Sub-par global economic growth and the strong US dollar have also weighed on demand.
The threat of policy tightening brings with it a greater risk of sell-offs in which all major asset classes are correlated on the downside. There is a risk that government bonds may not provide the diversification benefits they have offered historically. This presents the possibility that cash may become one of the few safe havens for investors, and will come down to whether the negative correlation between equity and government bond markets shifts into positive territory.