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AAM Viewpoints — Commodities: A Catalyst for Emerging Markets


 

This is a short follow up to our September commentary, “Emerging Markets are Undervalued.” First, Emerging Markets are still undervalued based on the number of standard deviations the valuation spreads between S&P 500 and MSCI Emerging Market Index are from their means. Now, let’s discuss a potential catalyst to help those spreads revert toward their mean. We believe rising commodity prices will be a boon for Emerging Markets. It is well known that commodity prices and Emerging Markets generally are highly correlated. This is due to Emerging Market economies being based around industrialization and resource exportation. Emerging Market countries tend to have more relaxed environmental regulations relative to more developed countries. As a result, investment in resource extraction is attracted toward those countries, hence them benefiting when commodity prices rise. 

The charts below show the correlation between the MSCI Emerging Market Index and that of S&P GSCI Index. S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. Average correlation between MSCI Emerging Market and S&P GSCI Index for the last five years (10/15/2016–10/15/2021) is 0.519. Correlation over the last 10 years sits as 0.497, 15 years is 0.54, and the last 20 years has been 0.504. The blue line in the four charts below shows the correlation between the two indices over various periods.

5-year correlation (10/15/2016–10/15/2021)5-year correlation (10/15/2016–10/15/2021)Sources: Bloomberg and AAM Analytics | Past performance is not indicative of future results.

10-year correlation (10/15/2011–10/15/2021)10-year correlation (10/15/2011–10/15/2021) Sources: Bloomberg and AAM Analytics | Past performance is not indicative of future results.

15-year correlation (10/15/2006–10/15/2021)15-year correlation (10/15/2006–10/15/2021) Sources: Bloomberg and AAM Analytics | Past performance is not indicative of future results.

20-year correlation (10/15/2001–10/15/2021)20-year correlation (10/15/2001–10/15/2021) Sources: Bloomberg and AAM Analytics | Past performance is not indicative of future results.

We believe it’s safe to say Emerging Markets and commodity prices have been highly correlated for a while. What does this mean for investors? We believe this is another reason for investors to potentially consider adding Emerging Market exposure to their portfolio. We believe the rally in commodity prices probably isn’t over yet. Global commodity supplies are tight, demand is rising, and there’s a labor shortage throughout the supply chain. These conditions aren’t going to work themselves out overnight. We believe this will continue to raise commodity prices, and that rise could be the catalyst Emerging Markets need to close their valuation spread with developed markets. 

 

CRN: 2021-1004-9501 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.


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