Investors pile into miners as commodity rally heats up
“Should prices for copper, gold and silver continue to increase from current levels, we are looking for increasing free cash flows for the miners, which should offset the impact of cost pressures.”
Indeed, analysts expect the rally in precious and base metals to extend into the second quarter despite the ongoing strength in the US dollar and spike in Treasury yields which are typically headwinds to the performance of both commodities.
Citi forecasts that gold, silver and copper have room to push 5 per cent to 10 per cent higher over the next three months and perhaps even 15 per cent to 20 per cent over 12 months.
“Robust physical and supply/demand tightness are part of the story – but financial flows and consumer hedging might also be in play, especially if the Fed proceeds with insurance cuts in the second half of 2024,” said Aakash Doshi, senior commodities strategist at Citi.
Indeed, Citi estimates that commodity assets under management for retail and institutional investors ballooned 13.7 per cent in March to $US720 billion.
That tipped valuations past $US700 billion for resources stocks for the first time since August 2022.
Traders have already begun piling back into physical commodities following a softer period last year when battery metals like lithium and nickel plunged. Indeed, Bank of America’s monthly fund manager survey showed a record jump in allocations to commodities this month.
The rebound is predicated on an improved outlook for global growth, which is buoying demand, and extremely tight supply.
Monetary puzzle
Elevated commodity prices could cause central banks to keep interest rates higher for longer, veteran analyst Jeff Currie said. “We’re talking about rates being higher for longer because growth is so good,” Mr Currie, who for decades was the face of commodities research at Goldman Sachs, said in an interview with Bloomberg. “We’re seeing a re-acceleration of growth across the board.”
As a result, the chances of oil rising above $US100 a barrel are “extraordinarily high”. Brent crude is fetching $US88.46 a barrel.
The ASX is uniquely sensitive to commodity prices, and any rotation in favour of miners comes at the expense of banks, brokers say. Lenders have outperformed miners by 12 percentage points this year.
But that trend is tipped to reverse over the next six months as analysts turn increasingly bearish on the banks on valuation grounds.
“The large gap in performance of resources stocks to banks can start to revert, and in a stretched valuation environment, we recommend that now is the time to start rotating,” said Morgan Stanley equity strategist Chris Nicol.
The Australian dollar’s disconnect from commodity prices could add another tailwind given most miners’ income is denominated in US dollars, Mr Nicol said.
Morgan Stanley recommended lifting holdings in BHP and Rio Tinto, and switched out its lithium exposure, Arcadium Lithium, to uranium via Paladin Energy. The broker suggests a large underweight in banks, where it argues investors are overly optimistic about the arrival of monetary easing.
Morgan Stanley believes banks are now unreasonably priced for the earnings growth they can deliver, joining a growing chorus of bears, including Citi and Macquarie, which are recommending investors sell the big four.
