Dear Reader,
Panic selling overnight has shattered market confidence in China, according to one Shanghai fund manager. “ China enters bear market”, says a Bloomberg headline this morning.
As we’ll see, this is just the beginning. We expect a bigger worldwide rout. A mass flight of money from overheated stocks into one undervalued asset that’s set to soar.
Last Friday we suggested that you cash out of copper shares because markets were set to turn.
Since then, Rio Tinto (ticker: RIO), Antofagasta (ticker: ANTO) and Freeport McMoran (ticker: FCX.US) have fallen by 5%, 4% and 8%. The price of copper is down 3%. I expect that they all have a lot further to fall.
Copper has been the bellwether of the global economy. It is widely-used in manufacturing and construction. So when the global economy is on the up, its price rises.
But here at The Right Side, we’ve been warning of a coming crash in the financial markets for some time. If the sharp falls on Friday and this week are not the beginning of that correction, they are a stark warning of what is to come.
That’s not to say that there are not still fantastic opportunities out there. In fact, one particular segment of the commodities market is set for massive gains. And you can get my latest report on the best way to play the commodity markets here.
To show you what I mean, let’s look at how different asset classes have performed during the recent rally. This gives a very clear indication of where the best opportunities are going to be over the next couple of months.
Emerging markets have been star performers
Take a look at the chart below. It shows you the relative performance of developed markets, emerging markets and commodity prices since the start of this year. The gains are in pure percentage terms to make their performance easier to compare.
Chart 1: Relative performance of emerging markets, developed markets and commodities 
The blue line tracks the emerging markets. And you can see that they have been clear winners. The MSCI Emerging Markets Index has risen by a sharp 44% since the start of the year. The red line shows the MSCI World Index, which measures the performance of the developed markets. It has risen by 12.39% over the same period. Meanwhile, the gold line, which tracks the Reuters/Jefferies Commodities Index, has risen by a more modest 8.29%.
This run-up has left global share markets hugely over-valued. In Europe, markets now trade at 36 time earnings, In China, the Shanghai market trades at 32 time earnings. In other words, if you invested in European markets today, it would take 36 years to earn back what you paid for your shares. It would take 32 years in China’s market. Neither of those makes investment sense.
Still, on average, the emerging markets offer much better value than the developed markets. Despite their massive run-up, on average they trade at about 18 times earnings.
As we’ve seen, there’s a substantial correction happening in China. We expect this to spread to other emerging markets in Asia and Latin America. And that will open up some excellent investment opportunities over the next few months.
Right now though, the real opportunity isn’t in shares. It is in one hugely undervalued segment of the commodities complex that I believe the real money is to be made…
There is still outstanding value in commodities
Let’s just look at that third line in Chart 1 above, which shows the Reuters/Jefferies Commodities Index. It measures the performance of 19 major commodities. You can see that it has lagged the performance of both emerging and developed market stocks.
As a broad asset class, commodities offer much better value than shares over the near-to-medium term. They have not seen the same sort of frenzied run-up in their price that shares have. At the same time, there is a real growing demand for them in some of the bigger emerging markets.
China, for example, bought record amounts of oil and iron ore last month. China’s buying has been the driving force behind the sharp run-up in metals and energy prices. But this isn’t where the real opportunity is…
In Chart 2 below, you can see that metals prices, in red, have shot-up by 40% this year and energy prices, shown by the yellow line, are up by 10%.
Agricultural prices, shown in blue, have actually fallen by 7% since the start of the year though. This is one of the few areas that still offer good value. That’s where the big opportunity lies for you at the moment.
Chart2: Relative performance of commodity prices 
Agricultural commodities haven’t seen the sort of insane price rises that most other assets have seen. There is still plenty of room for them to rise. And that is exactly what I believe is going to happen.
The El Niño weather phenomenon is starting to wreak havoc on weather patterns in the southern hemisphere. Drought is hitting parts of India and Argentina. Torrential rains are hitting farm production in Brazil.
These are all major agricultural producers. And the El Niño is only just beginning. We expect the price of coffee, cocoa, palm oil and other agricultural commodities to rise over the next couple of months as bad weather hits production badly.
And as the flight of capital from worldwide stocks intensifies, a lot of it could well end up in this most undervalued of asset classes.
Good investing,
Manraaj Singh
For The Right Side
Please note: Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary.
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