Investing.com – “Currently, there is a question about whether we are at the start of another commodity price and super-return cycle. We and a growing number of investors are seeing many structural similarities between the early 2000s and early 2000s. The last time commodities started a long, strong rally to record prices, ”explains James Locke, fund manager at Schroders (Color :).
According to this expert, now, as at that time, we have seen a significant reduction in investment in the supply of raw materials with a decrease in capital expenditures in gas and mining companies by about 40% since 2011. Demand for raw materials. Today, we may be on the verge of entering an unprecedented period of coordinated global capital investment to facilitate the energy transition. Shifting to clean energy sources and electric cars could accelerate demand for raw materials.
There are also some key differences. Today, the focus on climate change is likely to limit investment in fossil fuels even as prices rise, which could lead to a historical effect on supply. Moreover, heightened geopolitical tensions herald a period when resilience can Strategic supply chains and warehousing should boost demand for raw materials, from agriculture to minerals, ”says the Schroders fund manager.
Next, the manager looks at the top 5 reasons why they think commodities are bullish and why investors should look at the sector.
1. Raw materials are cheap in price
Cheap Commodity Ratings. Not only for other assets, like stocks, as the chart below shows, but also for history.
It should also be noted that when commodities are performing higher, they often do so with a wide margin, as shown in the chart below. Previous flowering periods were preferred when certain conditions were met. For example, the early 2000s saw the rise of China after a period of underinvestment due to the bear market in the 1990s, and we believe these good conditions are happening again.
As we move into the post-Covid world, governments around the world are enacting a mixture of fiscal and monetary policies that will be more commodity positive.
2. Inflation is on the way
In response to the 2008 global financial crisis, the world’s major central banks have attempted to bail out economies through the unconventional policy of quantitative easing (QE). Although this policy has made financial assets outperform real assets over the past decade, it has been extremely negative and commodity deflationary. However, the era of pure quantitative easing is over.
In the past 12 months, major central banks around the world have responded to the Covid-19 pandemic with a mixture of unconventional monetary and fiscal policies. The speed and size of these packages were unprecedented. Unlike 2008, there has been a multi-trillion dollar financial expansion, including “helicopter money” direct to households and businesses.
Some countries run fiscal deficits in excess of 15% of GDP, something we have not seen since wartime. Given the current indebtedness, this makes inflationary policy more attractive. We believe that the coordinated mix of aggressive fiscal and monetary policy means that inflation is on its way. This is beneficial for raw material prices.
3. The demand for raw materials will accelerate
The energy transition will see demand for minerals accelerate in the coming years, as the world begins to shift towards electric cars and more renewable energy sources. The graph below shows the expected increase in demand for electric vehicle batteries and charging infrastructure that will be required as part of the switch.
Other raw materials will also experience rapid growth in the coming years. Demand for agricultural products such as pork, pork and pork is also likely to rise, driven largely by China. Supply chain disruptions due to export restrictions during the Covid-19 crisis have also prompted many countries to devise long-term plans to create strategic food reserves, in particular, in order to reduce their dependence on imports.
The increasing demand from China is due to the country’s lack of arable land and the consequent inability to expand its agricultural sector. The rise in demand for these raw materials, especially pork, is also driven by China’s growing urban middle class.
4. Lack of investment could lead to the next commodity cycle
The decline in investment always precedes the next commodity cycle and the chart below shows that equity investments in major integrated oil and gas companies fell by 52% between 2013 and 2020. Meanwhile, capital investments in the copper industry decreased by 44% between 2012 and 2020.
The only thing that can stimulate investment in these sectors is an increase in prices. If it occurs to half the expected demand, then the supply will not be sufficient, which will lead to higher prices and stimulate investment.
5. It is expected that the value of the dollar will decline in the coming years
The US Federal Reserve (Fed) intervention during the Covid-19 pandemic to support financial businesses and consumers limited the appreciation of the dollar. Faced with the unlimited supply of dollars by the Federal Reserve in any crisis, investors have sought more attractive safe-haven options, such as the euro.
Concern about the double deficit of the United States (the fiscal account and the current account) also contributed to the depreciation of the dollar (see chart below). Hopefully, this will continue for years to come.
Moreover, the greenback’s emergence as a “reserve” currency may begin to fade as the euro gains strength and emerges as European leaders take a more proactive approach to stimulating economic activity.
A weak dollar is a positive for commodities. Although most of the raw materials are produced in emerging markets, their price is usually expressed in dollars. When the dollar weakens, the price of these commodities rises in dollars.