Commodity ETFs may continue to find support as stronger investment demand coupled with the ongoing global growth could help the market gain momentum.
“High correlation to emerging markets coupled with rising investor interest may further drive commodity prices,” Maxwell Gold, Director of Investment Strategy with ETF Securities, said in a research note. “Supply may slow further as strengthening emerging market currencies raise commodity producer costs. Demand supported by infrastructure and consumer spending.”
Gold pointed to five factors that could help contribute to rising commodity prices, including emerging markets’ strong correlation to commodities, rising investor interest, stronger EM currencies, increased infrastructure spending and growing EM middle class.
The emerging markets are a major source of both supply and demand for global commodities. Over the past decade, the relationship between the benchmark Bloomberg Commodity Index and MSCI Emerging Market Index has risen to a 0.57 correlation from a 0.39 correlation over the past 27 years. With the global economy chugging along and emerging markets strengthening, more raw materials will be needed to fuel the growth.
The rising interest in EM exposure may also propel flows into commodity funds and assets, Gold said. Commodities may be seen as a cheap alter naive to EM, especially after the extended underperformance in the commodities space.
Strengthening emerging market currencies may also weigh on supply or exports to other countries, which in turn would help support pricing. EM currencies have appreciate on the weaker U.S. dollar, demand for higher yielding EM assets and recovery in EM growth.