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Is it too early to pronounce the so-called commodity super-cycle over?
Just maybe. Two Canadian commodity indexes came out Monday, and they both suggest that raw materials are going through a modest stumble, not the huge blow up being forecast by the commodity doom and gloom crowd.
The indexes are from Toronto-Dominion Bank and Bank of Nova Scotia, whose top commodity analyst gave a relatively sanguine observation on the overall trend, despite April’s swoon for precious metals.
“Financial market concern over the outlook for commodity markets was overblown,” said Patricia Mohr, Scotiabank’s vice-president of economics.
A big worry for commodity bears is that China’s red-hot growth rate is slowing, but Ms. Mohr noted that while the Asian powerhouse’s first-quarter gross domestic product has slowed slightly, “actual demand for raw materials was robust in China. The double-digit growth of China’s passenger car market, up 20 per in [the first quarter], reinforces its importance as a driver of growth in worldwide auto demand and related commodities such as copper.”
Here at Inside the Market, we’re watching closely the debate on the fate of the commodity super-cycle, or the idea that raw material prices are in a generational upswing. If the cycle is intact, investors should load up portfolios with the usual suspects: miners, oil companies, forestry concerns, and fertilizer makers – sectors that just happen to be over-represented on the TSX.
If the long-term run is over, investors should head for the hills and dump any company in the raw materials business. The more venturesome could sell the Canadian or Australian dollar short while awaiting the terrible downturn that lower raw material values will inflict on the economies of the two resource-dependent countries.
Among the more prominent prognosticators forecasting an end to the long boom in commodities is U.S. money manager Stan Druckenmiller, who last week said the trend is over in remarks to New York’s annual Sohn investment conference. He forecast that one of the casualties of weaker commodities would be the Australian dollar.
But if commodities are about to roll over and play dead, it isn’t exactly what has been happening in the real world.
TD noted that there has been a sharp sell off in selected raw materials, but it has been narrowly based. “The pullback was largely concentrated in precious metals and industrials, while others, including natural gas, agricultural and forestry commodities, have held up quite well.”
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