Remember commodities? You know, good for making stuff and fuelling the odd supercycle? They’re back, sort of.
Commodity prices have quietly staged a respectable comeback over the past couple of months. U.S. crude oil is trading well over US$80 a barrel for the first time since last fall, gold bullion has shot up to record highs and a variety of other resources, from aluminum to cocoa, have caught the updraft.
These aren’t exactly boom times, as the entire resource space is trading well off its 2022 highs and still has a wobbly global economy to contend with.
But it’s a start. And a welcome one for Canadian investors, most of whom won’t have to do anything to get in on the action.
The Toronto Stock Exchange is still very much resource-based, even as the rest of the stock market universe seems to be operating in a postcommodity reality.
“Investors are not positioned for commodities to rise,” JC Parets, the founder of market research firm All Star Charts, wrote last week.
He noted that investors aligned with the S&P 500 Index have just 3 per cent of their portfolios in the energy sector, and 2 per cent in materials. Investors in the tech-heavy Nasdaq 100 Index effectively have zero exposure to resources.
For most of the past couple of years, stock trading globally has been dominated by the megacap Big Tech bonanza, which lately has become supercharged by intense appetite for anything related to artificial intelligence.
At best, resources are seen by the investing multitudes as cyclically out of favour. At worst, they are relics of the old economy soon to be made obsolete.
“There are very few large-cap resource companies left,” said Cole Kachur, senior investment advisor at Welllington-Altus Private Wealth in Saskatoon. “You see the Apples and Amazons becoming multitrillion-dollar companies, and that’s just not going to be happening anywhere in the resource sector.”
The largest 100 stocks in the S&P 500, for example, have just four resource stocks among them.
This is, of course, where the Canadian stock market diverges, with three times as much exposure to commodities than technology.
As a result, a heavy penalty has been imposed on the TSX, which has underperformed U.S. stocks in eight of the past 10 calendar years.
It’s been more than a decade of doldrums for commodities, in fact, ever since the last supercycle ended around 2011. The latest leg of misery, since 2022, has been fuelled by a downturn in manufacturing as well as China’s faltering economy, which is plagued by high debt levels and a real estate crisis.
Cue the glimmers of hope. Three months of encouraging data suggest the U.S. manufacturing sector is rebuilding after spending more than a year in a downturn.
The threat of a U.S. recession continues to fade, with expected interest rate cuts adding to economic optimism.
Several big names in market research see a solid setup for commodities, according to recently published notes to investors.
Goldman Sachs: “With the trough in global manufacturing behind us and our economists’ strong conviction of interest rate cuts in the U.S. and Europe … we expect further support to commodities demand and prices.”
Wells Fargo: “We view recent price weakness as an opportunity for investors to gain exposure to commodities for the next leg of the commodity bull supercycle.”
Bank of America: “If investors are right on the interest rate path, we believe commodity markets will tighten and commodity investors will benefit from handsome returns.”
Since the beginning of February, energy and materials have been the best-performing sectors of the S&P 500, with gains of 11.9 per cent and 9.2 per cent, respectively. Technology, meanwhile, is up by 7.6 per cent over that time.
Canadian investors can only hope that trend continues.
