Commodities are hot once again after a disastrous performance at the end
of 2018 when energy prices collapsed and the escalating U.S.-China trade war
spooked investors.
At the start of 2019, however, the sentiment is quite different from the
fourth quarter of 2018—signs have started to emerge that the world’s two
biggest economies will reach some sort of a trade deal.
Investors are plowing money back into specialized commodities funds with
billions of U.S. dollars of inflows into assets under management (AUM) in
commodities funds in the first quarter of 2019.
In January to March, commodities were also the asset class with best
returns of all assets.
Apart from hopes that U.S. and China will reach a trade agreement,
investor appetite for commodities is also boosted by signs of rising
inflation—an environment in which commodities typically outperform other
assets, The Street’s Simon Constable writes.
The markedly dovish stance of the Fed and other major central banks—a
U-turn from last year’s interest rate hikes—also boost interest in
commodities.
Commodities are also attracting investors looking to diversify from equity
markets, where price-to-earnings ratios suggest that stocks are overvalued.
According to a Barclays report, cited by The Street, investors plowed
US$14.7 billion in commodity funds in the first quarter of this year “amid
positive sentiment towards risk assets.”
“This reversed most of the losses in AUM during Q4 [the fourth quarter
last year], when investors withdrew funds as prices collapsed,” The Street
quoted the Barclays report as saying.
Related:
Gold Mining Stocks Are Soaring
A large part of the Q1 inflows into commodities funds—US$5.5 billion—was
piled into energy funds, followed by inflows into agriculture funds with
US$4.2 billion, with the rest invested in funds underpinned by precious
metals and industrial metals, according to Barclays.
Commodities were the best-returning asset class in Q1, according to data
from Bank of America Merrill Lynch Global Research, cited by the Financial
Times.
Between January and April 4, commodities returned 16.6 percent, beating
the 13.6-percent return of global equities and the high-yield bond return of
6.7 percent, BofA Merrill Lynch Global Research data showed.
Although the commodities’ top performance in Q1 comes from a very low base
in Q4 2018, when prices collapsed, commodities—especially mining
commodities—still have room to rise, because of supply outages and expected
limited growth, Colin Hamilton at BMO Capital Markets told FT.
According to Baird Private Wealth Management’s Q1
2019 Market ChartBook, year-to-date returns of the broad commodity market
in Q1 stood at 6.3 percent, while among the various commodities, crude oil
returned 30.2 percent, unleaded gas – 26.7 percent, and energy – 15.9
percent.
Going forward, the outlook for commodities could become even brighter if
the U.S. and China reach a trade deal and if Beijing manages to stave off
economic growth slowdown with fiscal stimulus. Since China is a major
commodities consumer, the health of the Chinese economy could be indicative
of the commodities performance.
ING expects
fiscal stimulus in China to continue supporting the economy throughout 2019.
Related:
Billion-Dollar Esports Niche Could Be In The 2024 Olympics
“If the external environment does not deteriorate further, we believe that
the fiscal stimulus and monetary easing on private firms should be large
enough to keep economic growth above 6.0%, which is in line with our forecast
of 6.3% growth in 2019,” said Iris Pang, Economist, Greater China, at ING.
Before 2019 began, BofA Merrill Lynch Global Research said in its Global
Commodities Outlook 2019 that commodities face three key downside risk
challenges this year: a meaningful increase in the Fed funds’ rate in the
next 12 months, an intensified U.S.-China trade war, and material worsening
in emerging market credit cycle.
At least for the time being, it looks like the first two downside risks
may not materialize this year. The Fed adopted a dovish stance in its latest
meeting, saying
that “the evolution of the economic outlook and risks to the outlook would
likely warrant leaving the target range unchanged for the remainder of the
year.”
Meanwhile, signs point to progress in the U.S.-China trade talks, with
Treasury Secretary Steven Mnuchin telling CNBC
on Wednesday “We’ve pretty much agreed on an enforcement mechanism” on a
trade deal.
By Tsvetana Paraskova for Oilprice.com
