Commodities underperformed developed market equities for the third consecutive year in 2013, following ten years of outperformance. Slowing China growth, US Fed tapering jitters and rising supply expectations have been the main factors weighing on prices. ETF Securities argues that 2014 will be a turnaround year for this laggard asset class.
Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities believes that China’s adjustment from 10%-12% GDP growth rates to more sustainable 7%-8% growth rates is now largely factored into market prices.
“Prices have largely adjusted to expected increases in the supply of a number of key commodities. We think markets are underestimating developed economy central banks’ bias towards supporting growth. Healthy demand growth in the US and China, disappointments to current highly optimistic supply forecasts for a number of key commodities, and continued ample global liquidity should support commodity prices in 2014 in our view.”
“Key risks to this scenario are growth disappointments in the US or China, more aggressive than expected Fed tightening, a large negative financial event, or a stronger supply response than current consensus forecasts. While all of these risks are real and need to be monitored, on our base case scenario we are bullish broad commodity exposure, copper, lead, platinum and palladium. We believe oil prices will provide range trading opportunities and we see interesting trades developing in agriculture. We think current strong negative sentiment towards the gold price is overdone. The gold price should rally if US growth disappoints and thus it provides a good risk hedge if optimistic consensus growth forecasts prove to be wrong.”
Key commodity trends in 2014:
- Lead, copper, platinum and palladium to be the main beneficiaries of broadening global economic recovery. China’s Third Plenum reaffirmed the strong commitment of China’s policymakers to supporting growth while implementing much-needed structural reforms. Accelerated urbanisation, policies to support private sector investment, and longer-term rationalisation of uneconomic state-owned commodity production should be supportive of commodity prices. The combination of 7%+ economic growth in China, continued developed world economic recovery, and ample global liquidity should support buoyant demand for industrially-linked metals. Our top long picks are copper, lead, platinum and palladium.
- Gold and silver prices hampered by rising growth expectations, but supported by physical buying. Physical buying of gold has remained strong, but not enough to offset negative investor sentiment as tactical investors have sold aggressively as the US dollar and real interest rates have increased. As long as the US dollar continues to firm and real interest rates rise the gold price will likely remain under pressure. However, we believe that a strong physical demand reaction to lower prices similar to that seen in the first half of 2013, together with falling gold production and lower supply from gold recycling will help to limit price downside.