Commodities Sector

 
Still UNDERWEIGHT for now
● Likely sluggish commodity prices
● Sentiment may remain cautious
● Maintain UNDERWEIGHT for now

Worst performers in 2012
Ever since we downgraded the commodities sector to Underweight last year on the back of an increasingly gloomy global economic outlook, commodities stocks were among the worst performers in 2012. Against the STI’s 18% jump until 11 Dec, the commodities stocks under our coverage fell by an average of 16%.

Still no light at the end of the tunnel
And with the major economies still looking somewhat shaky, we think that there may still be no light at the end of the long dark tunnel, or at least not in the first half of 2013 anyway. The International Monetary Fund (IMF) in its latest World Economic Outlook (WEO) report recently noted that there is now a one-in-six chance of global growth falling below 2%, which would be consistent with a recession in advanced economies and low growth in emerging markets and developing economies.

Commodity prices could remain sluggish
With the risk of a serious global slowdown still looking alarmingly high, the IMF expects to see commodity prices edge lower from now until 2013. Specifically, the IMF sees a gradual decline in crude oil prices to less than US$100/barrel in the medium term; for food, it also believes that the current food price spike should subside in the medium term in absence of major additional disruptions to supply; for metal, it notes that the markets are expecting some rebound after the sharp price declines in recent quarters in anticipation of possible stimulus measures in China.

Maintain UNDERWEIGHT
Besides the still gloomy economic outlook, investors’ appetite towards commoditiesrelated players – especially those with complex business models – is also likely to remain lukewarm in wake of the recent saga involving Olam and Muddy Waters. As such, we are maintaining our UNDERWEIGHT rating on the sector. Although we have a BUY call on Wilmar, we think that any runup towards our S$3.56 fair value would happen later rather than sooner.