Leading economic indicators. Global economic data have been pointing to concrete evidence of an economic recovery with PMIs rebounding, unemployment generally easing and consumer confidence recovering from their lows. Increased confidence of an economic recovery has enhanced investors' preference for cyclical stocks such as commodities. Indeed, increased economic activity and flow-through effects of pump-priming initiatives will strengthen demand for commodities. The impact is likely to be more pronounced on economically-sensitive commodities such as metals and energy, and less significant for agriculture. We expect companies with exposure to hard commodities or with extensive downstream operations to be the main beneficiaries of the economic recovery.

Multiple growth drivers. China's insatiable appetite for commodities, fuelled by its massive infrastructure-related fiscal package and reconstruction following the Sichuan earthquake, has supported organic growth over the last few quarters. Going forward, besides enjoying a more conducive environment for organic growth, the emergence of distressed assets may provide opportunities for inorganic growth. For instance, Olam Int'l (Olam) and Noble Group Ltd (Noble) recently purchased distressed assets as part of their expansion strategies, while Wilmar Int'l (Wilmar) has proposed to list its China unit as part of its long-term growth plans. We favour companies that are well capitalized with healthy balance sheets and strong cash positions necessary for the execution of inorganic growth plans.

Preferred picks: Noble and Wilmar. Commodities-related stocks have outperformed the STI by 56% on average YTD. Further upside potential exists for stocks that are trading below their peers' valuations while offering sustained growth prospects. We highlight Noble [BUY, fair value S$2.50] as our top pick because (i) it is best positioned to ride the economic recovery given its diverse product portfolio, (ii) valuations are undemanding at 13.6x PER vs. its closet peer Olam's 22.7x PER, and (iii) balance sheet offers superior flexibility. We also like Wilmar [BUY, fair value S$7.28] due to (i) the potential listing of its China unit, (ii) its strong balance sheet and (iii) the geographical diversity of its businesses. We upgrade the commodities sector to OVERWEIGHT from NEUTRAL on improving outlook. Key risks include the de-stocking of inventory build-up and a slower than expected economic recovery.