That is exactly how our markets are positioned. Nothing lasts here forever and history definitely rhymes, if not repeats. The better player just knows the rhyme is coming before it actually happens. This is exactly how I feel about the upcoming Bull Run in commodity markets. Everything is in place and commodities are set to rise, again.
Falling Dollar, Global Growth Revival and Cyclical Reversal – Our Major Bets
Historically, commodities and dollar trek on opposite path. When dollar strengthens, commodity prices fall and when dollar weakens, commodity prices go up. This is because commodities are priced in dollar so a weaker dollar inherently makes commodities more expensive- more dollars are needed to purchase the same ounce of any commodity. At the same time, weaker dollar means stronger Emerging Market (EM) currencies, thus as price for the EM countries fall, their demand increases. This, again, increases the commodity prices. The key question here is- Why should one expect dollar to weaken?
This finds its way from 3 global events – Fed is into new quasi Quantitative Easing which has historically caused dollar weakening, EU is set to incrementally perform better than the US which is again dollar negative and to add to it US dollar tops are 16 years apart – Dollar has already topped out. Finally, the cycle has turned to the other side
We see three key drivers of this commodity reflation:
US Dollar is beginning to rollover
A weaker US Dollar is likely to ease global tightness and trigger a commodity rebound. Fed is into new quasi Quantitative Easing which has historically caused dollar weakening, EU is set to incrementally perform better than the US which is again Dollar negative and to add to it US dollar tops are 16 years apart – Dollar has already topped out.
Global growth is beginning to stabilize
Global growth and trade will see revival with increased global liquidity and coordinated fiscal and monetary push.Global growth which has been sliding slowly is beginning to stabilize and is likely to see a recovery in 2020.
Commodities are now a cheaper asset class – set to revive
Commodity markets, especially Base Metals appear cheap with low levels of inventory, poor growth in new discoveries and low capacity addition. Moreover, given the current tightness in demand and supply scenario for most metals, the deep contango indicates the markets pessimism is reaching an extreme.
Metals Are Set To Gain
The final word here being that the wall has been hit multiple times and this is the final blow that will make it fall. Commodity prices will go up globally. Who stands to benefit? Well, the commodity selling companies whose earnings and margins are set to improve. India specific, NSE Metal index will become a good play.
This article was originally published on Edelweiss Blog. See original post >