RBC’s investment conclusion is: Exercise caution in an extended economic recession. In an environment where both the G-7 and emerging market economies are expected to contract in 2009, RBC Capital Markets remains cautious on base metals and bulk commodity stocks. However, it believes the precious metals, uranium and fertiliser sectors appear to offer investors more attractive returns. The following summarises RBC Capital Markets’ view of the expected commodity and equity performance in 2009.

Volatility in commodity and mining share prices is expected to continue. While seasonal demand and a bear market rally may provide near-term upside, RBC Capital Markets believes that as the market comes to the realisation that the global economy could remain stagnant into 2010, investors are expected to continue to be net sellers of resource stocks and commodities. Investors may make reasonable returns with short-term trading strategies; however, buy-and-hold strategies are very risky.

Upside for gold and silver in H1/09, then de-stocking risks into H2/09 (Overweight). Given the amount of monetary and fiscal stimulus that is being pumped into the system by central banks and governments, RBC Capital Markets would expect gold and silver to perform well early in 2009, in line with previous periods of economic stimulus. However, an extended contraction of the global economy would put significant pressure on emerging market economies, which in RBC Capital Markets’ view would likely result in significant de-stocking of precious metals, similar to the trend observed 1997 and 1998 as the Asian currencies collapsed and economies contracted.

The PGM pricing basket is expected to remain weak throughout 2009, due to the lack of supply-side discipline and weak auto market. Similarly, rough diamond prices are not expected to rebound until later in the economic cycle (Underweight).

Uranium is expected to perform relatively well in 2009 (Market Weight). Power utilities and investors have been showing renewed interest in uranium, which has resulted in record spot volumes in 2008 and the spot price rebounding off of its recent lows. Significant production cuts were announced in late 2008 and RBC Capital Markets thinks the supply side of the equation remains at risk while demand appears to remain in line with RBC Capital Markets’ expectations.

RBC expects fertiliser stocks to perform well in early 2009 (Market Weight) based on its view that potash prices will remain relatively high and fertiliser demand should pick up ahead of spring planting. It expects the settlement of the 2009 Chinese potash contract (expected in Q1/09) to be a key catalyst for valuation improvement within the sector. A sustained rally is dependent on overall crop prices, which remain supportive for spring and fall fertiliser demand in 2009.

Seaborne iron ore and coking coal are expected to underperform ahead of the April 1 JFY Japanese steel maker contract-renewal period (Underweight). In an extended recession RBC expects to see significantly lower sales volumes in 2009 and there could be further price deterioration into the 2010 JFY contract-renewal period this time next year.

Look for continued base metal weakness (Underweight). In the current economy where base metal markets are in surplus, LME stockpiles are rising and the various global economic indicators continue to decline, RBC Capital Markets would not expect to see any sustained base metal rally in 2009.

M&A activity and restructuring of failed enterprises are expected to continue in 2009, particularly given the significant amounts of debt taken on by the base metal mining companies, continued closures of steel mills and the need for “asset rich / balance sheet poor” companies to seek strategic partners.