Brazil and Russian equities were the best performing equity markets in 2016 largely driven by an uptick in commodity prices from lows. Optimism is coming back to commodities on the back of expectations of Trump infrastructure spend leading to higher demand for commodities.
China singularly drove commodities prices up in the decade to 2010 prompting many to term the commodity boom as a Commodity Super Cycle. However, China is feeling the weight of unfettered growth and has virtually led the commodity bubble to burst as seen by the sharp rise and fall in the Reuters CRB Commodity Index. The commodity price bust has hit commodity dependent economies, leading to recessionary conditions in many economies of the world including Russia and Brazil, which depressed global growth and which further hurt commodity prices during the year 2015.
China’s devaluation of its currency in August 2015 and 25 bps Fed rate hike in December 2015 drove commodity prices to lower levels in 2015 and early 2016.
Of all commodities, crude was the worst performing commodity, prices hovered between USD 26 and USD 34 a barrel for both US and international benchmark crude till early 2016, this price range equates to an 85% drop in oil prices since 2013.
Indonesia, Russia, Brazil, Saudi Arabia and other Middle Eastern and Central Asian commodities driven economies suffered considerably as oil prices fell, leading to lower currencies and a shift of foreign capital from their markets.
Commodity prices bottomed out in 2016 as markets factored in better growth prospects for the US post Trump victory in November. Eurozone too is witnessing economic recovery, albeit muted while China growth looks to have bottomed out at lower levels.
Table 1 shows how commodity driven economies indices have performed during 1st January 2013 to 1st January 2016. In the same period major indices such as Nasdaq, Dow Jones, S&P 500, DAX, Sensex and Nifty gave 61%, 30%, 40%, 40%, 30% and 32% returns respectively.
Table 2 shows how commodity prices have performed during 1st January 2013 to 1st January 2016, both tables which are mentioned above shows a good correlation between commodity prices (table 2) and indices (table 1).
Crash in the commodity prices had a ripple effect in countries like Russia, Indonesia and Brazil, which had almost shattered the gains of their respective indices.
In 2016, major commodities prices have risen in double-digits (given in table 2) which shows signs of revival in prices, during the same period commodity reliant economies indices (given in table 1) have outperformed major global indices by a wide margin mainly due to increase in commodity prices.
If commodities continue to outperform in 2017 compared to other asset classes, then indices mentioned in table 1 can outperform global major indices as they are heavily reliant on commodity prices. Commodity stocks in India too could gain if commodity prices rise consistently in 2017. Rise in commodity prices would depend on higher demand from the US and China. US demand again would depend on the fiscal measures of the government while China demand would depend on government policies to push growth.
Click here to read our Commodity Strategy Note for 2017.