EDITOR'S NOTE: The interesting thing about the current commodity bull run is that while analysts predicted a supercycle over two years ago, their outlook predated the pandemic, the supply disruptions that followed, and Russia’s invasion of Ukraine. While none of these events were predictable, these early forecasts tell us that experts believed a major commodities bull market was already underway, and that these unexpected events just happened to put the cycle into overdrive. Fast forward to the present, JP Morgan bank is telling us that “the commodity bull run will likely continue.” What are the major fundamental drivers, which commodity classes are likely to be impacted, and how might you position yourself with regard to the coming opportunities and risks? If you’re still trying to figure out an inflation play, the article you’re about to read provides plenty of ideas and insights to consider.
- JPMorgan Private Bank favours a basket of soft and hard commodities with prediction for 10-15 per cent upside over the next 12 months
- The mix of price drivers – from pullback in capital spending to supply-chain disruptions and war – may change but the trajectory will likely be sustainable
Containers stacked at the Lianyungang Port in eastern China’s Jiangsu province. Photo: Xinhua
Investors should buy commodities as a hedge against inflation and geopolitical risks, with a composite basket of raw materials likely to help protect their capital as stocks and bonds failed to offer sufficient diversification benefits, according to JPMorgan Private Bank.
An index tracking 23 commodities from gold to crude, copper and soybeans across six different sectors tracked by Bloomberg could jump by 10 to 15 per cent over the next 12 months, it predicts. The index has risen 32 per cent this year, and more than 50 per cent over the past year.
A confluence of factors has helped propel commodity prices since mid-2020, including underinvestment during the pandemic and lockdowns in Shanghai and elsewhere that disrupted production and supply chains. Russia’s invasion of Ukraine has also destroyed supply, nullifying the effect of China’s economic slowdown.
“The correlation with inflation, whether as a driver or consequence, has helped insulate portfolios in an inflationary regime and has also provided good diversification in portfolios in 2022,” the bank said in its Asia cross-asset strategy report on May 5. “The mix [of drivers] may change in the years ahead, but the trajectory will likely be sustainable.”
Crude prices rallied 6 per cent last week to near US$110 a barrel after the European Union stepped up its sanctions on Russia by eliminating oil from the country within six months, a move likely to be met with retaliation. The outcome would be continued pressure on oil and natural gas prices, it added.
WTI crude could trade between US$93 and US$103 per barrel over the next 12 months, with a potential to hit US$150 should Russian oil become harder to source, the private bank forecasts. Natural gas, which has surged to a 13-year high, could hold at US$7 to US$7.75 per million British thermal units.
Faster inflation, signs of social unrest in emerging markets, including lockdown angst in China, and poor diversification benefits from bonds, could keep the “emotional premium” in gold prices alive, the bank added. It expects the yellow metal to fetch US$1,875 to US$1,975 an ounce by June next year.
“The commodity bull run will likely continue,” said the private bank, which is part of JPMorgan’s asset and wealth management unit that managed US$4.1 trillion of clients’ money at the end of March. “We continue to favour the trade” while staying selective on quality stocks and core fixed-income for protection, it added.
The market may have already seen the secular lows in commodity prices in 2020, and the recent price surge is the beginning of a new secular wave, Chen Zhao, chief global strategist at Alpine Macro said. If so, this new secular bull market has developed for reasons that are very different from the last bull market in the 2000s, which was predominantly a China story, he added.
“If the world is on the verge of another secular bull market in commodities, a large allocation to hard assets could be essential for alpha production, particularly if equity performance is undermined by inflation staying higher and for longer than most anticipate,” Chen wrote in a special report on April 25.
As for portfolio strategy, “buy the dip” is the right bet in a secular bull market, Chen said. It is still best to wait for a price pullback, when the US policy tightening begins to strain the economy and policy reflation will have returned China’s economy to an accelerating path, he added.
The promising upside would still trail the prospects of a sharper rally of 25 per cent to 41 per cent in stocks in mainland China and Asia-Pacific outside Japan over the next 12 months, based on forecasts by Asia strategists at Goldman Sachs. The outlook is partly riding on hopes Chinese President Xi Jinping will stimulate the economy to arrest the slump.
Stocks in Hong Kong and mainland China sank on Friday amid inflation and rate hike jitters after the Federal Reserve lifted its key rate by the most in two decade. That followed a sell-off on Thursday that erased US$2.4 trillion from the S&P 500 and Nasdaq benchmark members.
“We are entering a synchronised tightening cycle and it will be a global challenge for central banks to engineer a soft landing,” JPMorgan Private Bank said. The Federal Reserve “might not like being seen as dovish”.
Elsewhere, Ukraine war has also pushed world food prices to fresh highs in March, partly due to the loss of supply from Ukraine, among the world’s biggest grain and vegetable oil shippers. Wheat and corn prices have hit record highs this year, further aggravated by rising fertiliser prices.
“The situation in Ukraine has not yet stabilised and continues to pose a threat to commodity supplies,” according to BCA Research. “Thus, negative surprises stemming from the conflict remain a potential source of upside risk to commodity prices over the near-term.”
Originally published by South China Morning Post.