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'Yes' to commodities, 'no' to real estate as investors brace for the rest of 2020 - Wells Fargo

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(Kitco News) When considering investment choices for the rest of 2020, look at commodities and not real estate, stated Wells Fargo’s 2020 Midyear Outlook Spotlight report.  

The coronavirus crisis has turned the investment world upside down. And as economies begin to recover, Wells Fargo is making significant changes to its investment outlook — saying “yes” to commodities and “no” to real estate.

“As 2020 has unfolded, much has changed, and many investment strategies had to be retooled. In the real assets space, we made two important tactical tweaks. We downgraded real-estate investment trusts (REITs) to unfavorable, and we upgraded commodities to favorable,” said Wells Fargo head of real asset strategy John LaForge.

The reason why investing in real estate might not be a good idea is because of the difficulties many businesses, including retailers, might have paying for rent going forward.

“Impacts from the novel coronavirus have made many real estate sectors’ futures uncertain. From retailers struggling to pay rent to office space likely to shrink, the future for real estate does not look so rosy, even post-pandemic,” LaForge wrote on Monday.

Wells Fargo is currently advising to sit on the sidelines “until some discernably positive trends emerge” when it comes to the real estate market.

Commodities also struggled this year as economies around the world came to a halt, but the biggest difference is the recovery that is coming to the commodity sector, noted the report.

“Commodities have been hit hard in 2020 too, but if history is any guide, this could be an opportunity. In past instances when commodity prices had been hit this hard, dramatic supply reductions often have followed. When demand eventually does return, and it always has, supply can be slow to return,” LaForge explained.

This opportunity is often missed by investors as strong rebounds and often underestimated in the commodity space, the report pointed out.

“Many weak marginal suppliers get wiped out during the commodity price drop. Commodity prices eventually rise as less supply is available. Interestingly, investors frequently miss this opportunity,” LaForge said. “Commodities remain one of our favorite asset classes as we head toward year-end 2020.”

As an example, Wells Fargo provided an oil chart, showing how investors underestimate oil’s bounce.

"The chart shows the price of West Texas Intermediate crude oil and investors’ futures positioning at major price bottoms (dashed lines). Notice that investors often underestimate oil’s bounce potential,” LaForge said.

The report projected a solid U.S. economic recovery in the third quarter with moderate growth expected in 2021.

“The global economy has turned from the worst of its second-quarter free fall toward a growth recovery of still undetermined strength and staying power. We expect a strong initial rebound from arguably the deepest—and shortest—recession since the 1930s’ depression, propelled by aggressive government support, pent-up demand, and, in general, recovery from an unprecedented quarterly economic decline, based on data since 1875,” Wells Fargo strategists Gary Schlossberg and Peter Wilson wrote in the same report.

Wells Fargo also expects a weaker U.S. dollar going forward, which will work in favor of diversified portfolios.

“A weaker dollar and U.S. leadership in a moderate global recovery lead us to our tilt toward U.S. assets in diversified portfolios. The slow recovery through 2021 continues to favor higher-quality, more liquid assets over more highly charged market segments,” the report said.

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