The portfolio’s underperformance far this year has been concentrated in the base metal sector. Year to date, zinc has declined by -14%, copper’s down -11% and nickel has fallen over 16%.

Commodity bulls have been particularly frustrated the last couple of weeks with the escalating US-China trade sanctions which have accelerated the commodities sell off. The primary headwinds in 2018 for commodities has come in three forms; 1) weakening global trades; 2) a rising US$, and 3) liquidation in commodity pits. The latter likely enhanced the decline the last few weeks, especially for copper prices. Strangely, the outperformance in the material equities relative to their commodities, implies that most of these factors have been priced into the stocks. If the recent release of OECD Leading Economic Indicators (LEI’s) is to be believed, commodity prices have fallen too far too fast. As the following chart shows, typically there is a strong relationship between the BRIC composite, LEI and the CRB Spot Index. This is especially true at cyclical CRB peaks such as in 2011 and 2014. The fact that BRIC LEIs as a group are still rising we believe that the recent dip represents a buying opportunity.

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