Do commodity prices suggest stock markets are right to be bullish?

Image of copper wires

A surge in the oil price to six-month highs above $70 a barrel, using Brent crude as a benchmark, is grabbing a lot of headlines.

Uncertainty over Libyan and Venezuelan output is contributing to crude’s gains but a greater near-term influence appears to be US President Donald Trump’s determination to exclude Iranian supply from global markets. The White House is withdrawing a sanctions waiver from eight nations who buy oil from Tehran with the likely result that around 1.2 million barrels of oil a day will be unavailable – no small matter in a market where supply and demand are already finely balanced around the 99-million-barrels-a-day mark.

That said, the President is already calling on OPEC, and Saudi Arabia in particular, to increase output to ensure that oil prices do not rise sharply. A big jump in prices at gas stations is the last thing Mr Trump will want to see, as it may jeopardise his target of 4% GDP growth and also dent consumer confidence as he prepares for the November 2020 presidential election.

And this shows the inherent difficulty of investing in commodities, as so many factors can affect supply or demand in the near term. They can be related to technical issues, the weather, geopolitics, human error, changes in taste or fashion, disease and currency movements, as well as economic growth.

“This shows the inherent difficulty of investing in commodities, as so many factors can affect supply or demand in the near term.”


Wide range of results

These challenges are reflected in the performance of individual commodities in 2018 and 2019. Very few clear trends emerge over the last 16 months, barring perhaps the strong gains made by palladium, helped by a switch by car-buyers from diesel to petrol cars following a string of emissions scandals; a fall in coffee, due to last year’s bumper Brazilian crop and a drop in Brasilia’s currency, the real, which is fuelling low-priced exports; and the failure of gold and silver to do much at all.

Performance of leading commodities in 2018 and 2019

Source: Refinitiv data

You would have needed a crystal ball to spot (and buy) the best-performing individual commodities of 2018 and 2019 to date.

“You would have needed a crystal ball to spot (and buy) the best-performing individual commodities of 2018 and 2019 to date.”


Last year, wheat sat on top of the pile, thanks to how hot and dry conditions hit supply of American hard red winter wheat and crops grown in Southern Russia.

This year’s biggest gainer so far is live hogs. An outbreak of African swine fever in China, home to the world’s largest pig population, is driving prices higher amid fear that up to 130 million animals, or a third of the total Chinese drove, could be lost.

Global trends

The lack of a yield and their price volatility may still deter many advisers and clients from seeking exposure to commodities and they may not be suitable or appropriate for everyone. Those who do feel raw materials may offer some useful diversification in a balanced portfolio still have to address the question of how best to address the asset class.

The wide range of performances between individual commodities means that time-pressed advisers and clients are unlikely to want to take the risk of trying to choose between the ‘right’ and ‘wrong’ commodities at any given time.

They may instead prefer to seek broad-brush exposure, via a tracker which follows a basket of materials or a fund that invests in quoted companies that are involved in agriculture, energy or mining.

This strategy is at least gaining some succour from a solid performance in 2019 to date of the Bloomberg Commodity Index, a basket of 23 raw materials following this year’s first-time inclusion of low-sulphur gas oil.

Energy and Grains are largest constituents of Bloomberg Commodity Index

Source: Bloomberg

The 10% fall in the benchmark in 2018 is easy to understand in the context of the global growth scare and equity market sell-off that gripped financial markets in the fourth quarter. And this year’s 8% advance looks to make sense in the context of a recovery in the US equities in particular, but also the broad FTSE All-World index, which is up by a handy 15% in 2019 to date.

Bloomberg Commodity Index is recovering from a rocky 2018

Source: Refinitiv data

This gain may also give buyers of bonds some pause for thought, if it does mean that a truly inflationary recovery is finally upon us.

The situation is still far from clear cut, since energy represents 30% of the Bloomberg Commodity Index, so oil’s 40%-plus gains this year will be exerting great influence over the benchmark. But those advisers and clients who are bullish on equities (or commodities for that matter) may be able to draw some comfort from a 6% gain in ‘Doctor Copper’, the ductile, malleable, widely-used metal which is traditionally seen as a good guide to the health of the global economy.

‘Doctor Copper’ is showing welcome signs of a return to health in 2019

Source: Refinitiv data

One potential warning sign, however, remains the Baltic Dry Shipping index, a measure of activity in dry bulk cargoes such as grains, ores, coal and building materials. It is still down by around a third this year, to perhaps reflect weak global trade flows, and a recovery here would provide some comfort that equity and commodity markets are right to have faith in the globe’s economic growth prospects for 2019 and beyond.

“A recovery [in the Baltic Dry Shipping index] would provide some comfort that equity and commodity markets are right to have faith in the globe’s economic growth prospects for 2019 and beyond.”


Baltic Dry Shipping index sank speedily in early 2019

Source: Refinitiv data

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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