Time to allocate commodities to your Portfolio!
As a follow on post to the ‘ Are we heading towards Hyperinflation’ , the recent data/events and actions re-affirm a firm belief that it is time to allocate commodities to one’s portfolio. Let me put together the pointers that has led us to this belief:
1. The U.S. will continue to do ‘quantitative easing’ to ease the credit crunch..Unfortunately, it has not yielded meaningful results till date. According to Meredith Whitney,the Small and Medium Enterprsises in U.S. [ which contribute to over one-third of the GDP] till date have been increasingly denied access to credit.The SMEs are the prime engines of innovation and employment revivals[represents 50% of the nation's workforce]. Lack of credit leads to lay offs and closure of businesses.
2. The U.S. Government’s intent to stimulate the economy through more consumption[ like cash for clunkers program, etc] would not work, since the consumers are paying off their debt and saving more. The notion that over 70% of GDP contribution would still come through consumption seems to be history.
3. Dollar[due to zero interest rate policy] has now replaced the yen as the ‘carry trade’ for investors, fuelling asset bubbles across emerging markets.
4. Recent data put out by IMF indicates that Fiscal Stimulus doesn’t work in reviving the economy, when the fiscal deficit is beyond 60% of GDP. The U.S. has already reached that level.
5. When all mechanisms to revive the economy fails, drastic depreciation of the currency would be the only option for U.S. to revive its economy. This would temporarily bring down the soaring un-employment rates and push consumer prices upwards[deflation to inflation].
Recent Report published by David Rosenberg on The case for commodities captures the above premise very well and also suggests how investors now should re-align their portfolios.
It clearly raises a strong case for commodities. As history shows, during high inflation its the commodities and precious metals which not only acts a hedge to our portfolios but performs better.
What does all this mean to the Indian Investor? Our country and other nations across the world has very high correlation to U.S. and hence what happens there does impact us. For eg. 16% of world GDP consumption is still driven by U.S. investors.
To sum up, it would be prudent to trim equity portfolios , add commodities & precious metals [with a 20-25% exposure] and increase fixed income allocation in your portfolio.
After all, Portfolio Diversification and Dynamic Asset Allocation is the way to preserving and managing our wealth in these uncertain times.
