There is excessive pessimism in the price of commodities
The outlook for commodity markets may be brighter than many investors appreciate, given recent price action and the current state of the global economy. Recession risk is on the rise, to be sure, but for those with longer-term horizons who can look through near-term volatility, our models at Rosenberg Research are saying that now is a good time to add exposure.
With inflation inching back to target and a loosening of labour market conditions, the U.S. Federal Reserve is set to unwind the sharpest tightening cycle in four decades. This invariably translates into a weaker U.S. dollar, with a similar unwind seen in the early 2000s and in the wake of the global financial crisis, when we saw the dollar index weaken by 33 per cent and 23 per cent, respectively.
Investors have abandoned commodity exposure, and the asset class is completely unloved. Overall sentiment and positioning in the space are negative, increasing the odds of a surprise to the upside on any positive news. In terms of positioning, average CFTC net positioning across commodities is at a lowly 20th percentile reading, while 12-month rolling net flows into natural resources ETFs as a percentage of total ETF flows are at a 17th percentile reading. What’s more, Consensus Inc.
Industrial metals and minerals: Copper and aluminum are seeing increased demand as the world beyond China focuses on manufacturing, creating more demand while the supply side has yet to catch up. The transition to cleaner sources of energy is adding to uranium and lithium demand, while securing their supply remains relatively challenging.
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