Protect Your Portfolio from the Commodities Market Meltdown

Booming growth in developing markets, coupled with inflationary money-printing in the U.S. and Europe, helped fuel a bull market in commodities for a dozen years.

Today, though, Wall Street is flashing a yellow light: Commodity bugs had better scoot to avoid being squashed by the global slowdown.

"The secular bull market in commodities is done," says Jeff Weniger, senior investment analyst at Harris Private Bank. "Finished. Kaput."

Don't let the recent rise in prices for oil (partly caused by unrest in the Middle East) and corn (the drought in the Midwest) fool you.

While central banks are still courting inflation by pumping up cheap credit, which may be bullish for gold, global economic growth continues to cool. That, in turn, has slowed demand for raw materials ranging from steel to Arabica coffee beans; the prices of many began to slide last year.

China holds the key, as it accounts for 30% to 60% of demand for several industrial metals, says Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management and author of the global investing book "Breakout Nations." But that economy is decelerating and may never regain its former pace.

Even longtime commodity fans are adjusting their expectations.

Mihir Worah, manager of Pimco Commodity Real Return Strategy Fund , thinks basic materials will continue to offer long-term inflation protection. The decline in prices, though, is a clear sign "the bull market is maturing."

That is something you must pay attention to, even if you don't own commodities directly. Raw materials are linked to emerging-market stocks and affect profits globally.

Pros like Worah and Sharma suggest three ways to guard against and profit from this turn.

Shift your emerging-market focus

The so-called BRIC countries -- Brazil, Russia, India, and China -- have been a mainstay of foreign portfolios, as they delivered 37 times the gains of global equities between 2000 and 2009.

These markets, though, are among the most sensitive to commodities, as Russia and Brazil are leading energy producers and India is a big source of agricultural goods. And while China is a major raw material consumer, it is also a huge supplier of industrial minerals and metals.

Since the Dow Jones-UBS Commodity index started to fall last year, BRIC stocks sank more than foreign shares in general.

Because these regions represent more than 40% of the developing world's market capitalization, it would be hard -- and foolhardy -- to eliminate them from your portfolio. You can, however, go with a conservatively managed fund that's cautious with these countries.

Take Scout International . Jim Moffett, manager of this fund, has reduced stakes in Brazil and India and shied away from investing directly in Russia or China. He does have commodity exposure, but mostly through investments in developed countries such as Australia.

Focus on firms that benefit from low commodity prices

Kurt Umbarger, a global equity portfolio specialist at T. Rowe Price, suggests moving up the production chain -- into shares of manufacturers benefiting from cheap materials. T. Rowe Price Emerging Markets is doing just that with a big stake in Samsung.

Related: Investing in China: Handle with Caution

Looking for a more globally diversified collection of industrial stocks? Vanguard Industrials ETF owns multinational manufacturers such as General Electric and 3M .

Opt for a more defensive commodities fund

Investors who want to keep a commodity hedge -- for fear inflation will eventually reignite -- can reduce risk by sticking with funds, like Worah's, that are pulling back from the riskiest resources.

In response to declining factory orders, Worah has lightened his exposure to industrial materials while overweighting precious metals. Since last year, his fund has eked out slight gains while the average commodity fund has lost ground.