What Assets Are Gaining Most with the Bounce in Commodities?

In 2015, all commodity-sensitive assets were in steep decline. Inextricably tied to the strength in the U.S. dollar, commodity-producing countries and currencies were under pressure, for example, the Russian ruble, Australian dollar, South African rand, Chilean peso, Canadian dollar, New Zealand dollar, Norwegian krone and Brazilian real.¹ But things have really been turning around so far in 2016.   The Fed Changed Everything After the December 2015 meeting of the Federal Open Market Committee (FOMC), where the target band for the Federal Funds Rate was moved from 0.0%–0.25% to 0.25%–0.50%, the consensus was clear: expect four hikes in 2016 and get to a potential 1.50% at the upper end of the range.² After the volatility seen in January and February of 2016, that consensus was adjusted significantly, slowing the pace of expected rate hikes. One result: Anyone who allocated to strategies that couldn’t have been more contrarian in 2015 has been rewarded thus far in 2016. As consensus has adjusted, we’ve seen a distinct change in trend for both commodities and for the U.S. dollar from 2015 into the first part of 2016.   Exposures Benefiting from the Change in Trend • WisdomTree Commodity Country Equity Index: The aim of this strategy is broad-based exposure, concentrating on markets where commodities have a great deal of importance. Eight countries—Brazil, Russia, Chile, South Africa, Australia, New Zealand, Norway and Canada—are equally weighted in their exposures, which are rebalanced annually. There are two real levers for performance: 1) the currencies of these markets tend to exhibit high sensitivity to commodity price moves, and 2) the equity markets in these markets tend to be very sensitive to the prevailing sentiment surrounding commodities.   • WisdomTree Australia Dividend Index: Australia’s currency largely trades off sentiment surrounding China and commodities. As commodity currencies were weak over recent years, so was the Australian dollar. But during the rebound in 2016, Australia has been one of the leading developed world countries. WisdomTree created a dividend yield -weighted Index with a goal of providing more balanced Australian exposure than the traditional market capitalization-weighted indexes that can allocate up to 70% to the Financials and Materials sectors.   Currencies Can Pull Returns Up Significantly (12/31/2015−4/20/2016) For definitions of indexes in the chart, visit our glossary. • Currencies Make a Complete About-Face: In the WisdomTree Commodity Country Equity Index thus far this year, the Russian ruble is up nearly 13% and the Brazilian real is up 12.3%, while the currency return of the Index has been a positive 8.4%. The high beta of this approach has come largely from a currency impact that has been approximately twice as strong as that of the MSCI AC World ex-US Index. It is interesting that with the 6% gain in commodities, the Index is up nearly three times as much off this initial rebound.³   • WisdomTree Australia Dividend Index Crushes MSCI Australia Index: The MSCI Australia Index had more than 50% of its weight in Financials, which was more than twice the exposure of the WisdomTree approach. This means that the WisdomTree strategy is over-weight in most of the other sectors—and since they are nearly all doing better than Australia’s Financials sector, this has helped. Additionally, mid- and small caps in Australia have done well, and the WisdomTree Australia Dividend Index had greater exposures here due to its approach weighted by dividend yield.         ¹Source: Bloomberg, for period from 12/31/2014 to 12/31/2015. ²Source: “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents under Their Individual Assessments of Projected Appropriate Monetary Policy, December 2015” Federal Reserve. ³Source: Bloomberg, for period from 12/31/2015 to 4/20/2016.