HAVE COMMODITIES REACHED ITS LOWEST?
Many investors are wondering if commodities have touched a bottom. Based on a Bloomberg data, commodity prices have been plunging for over four years, making it the worst performing asset class this year. The sector sustained the most severe losses in cyclical commodities, including oil and industrial metals. Also, the commodity asset classes is down by almost 50% from its 2011 peak.
Commodities have been affected by several supply and demand trends, which won’t be going anytime soon. But it is way too early to consider commodities have bottomed. Here’s why.
Demand suffered due to global growth degeneration, specifically from commodity-intensive emerging markets. Slower global growth has been linked to a severe dive in inflation projections. Commodities are considered a hedge against inflation, but the decline has resulted in a dwindling investor demand. Commodities are also hurt by a firmer US dollar, which will likely continue due to long-term global trends, including divergent monetary policies. Dollar bulls tend to last six to seven years.
On the supply side, over 50% reduction in the US rig count has only begun to degenerate US domestic oil production. Quite challenging for commodities, especially the energy sector. Production has increased as shale producers improve efficiency. As of present, the United States produces nearly 300,000 barrels a day over a year ago. Many Gulf countries have bolstered their own production to maintain market share since America and world leaders seal the nuclear agreement with Iran.
The overall supply and demand can change drastically, specifically for oil. Hence, expect lower prices to create an impact on demand. Also, several factors which have pressured commodity prices will likely remain in place throughout the year.
Like what was said before, it is too soon to say commodities have bottomed. But do not expect a strong, rebound in prices either. Oil should level off around current levels at this rate, but it is difficult to picture a firm rebound without any US production.
Investors, here’s what you need to know: commodity producers will have more interesting opportunities than the physical commodities. Some bargains are about to emerge for investors with longer-term view. Be selective, though. Most commodity-linked stock sectors are inexpensive. However, the drop in valuations tends to trail vanishing fundamentals. Either commodities inch lower or fundamentals begin to improve.
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