Chart of the Week - Commodities Cheap
Remember the “Commodity Supercycle”?
Back in 2021-22 a lot of folk were talking up the Supercycle narrative, and for some very good reasons e.g. prolonged underinvestment in supply by commodity producers, structural and thematic drivers of demand such as the energy transition, but also short-term factors like the stimulus-fueled surge in growth, and let’s face it a key driver of supercycle-narratives was just plain fizzy bullish sentiment.
Since then we’ve been through a cyclical bear market — not the type of cycle many were expecting, and certainly not very super.
But now is not the time to give up on commodities or even to deride the idea of a supercycle, because there are a lot of very good fundamental reasons for commodity prices to go up over the medium/long-term, and a couple of very interesting tactical signs appearing.
This week’s chart shows my composite valuation indicator for commodities (talking in aggregate —at the asset class level; specifically looking at a diversified index of commodities). The key point is commodities look cheap again.
Aside from the reset in valuations, I’ve also noticed a material reset in sentiment, positioning, and allocations: the mood is bearish-to-skeptical now, and a stark contrast to crowded longs and consensus bullishness around the peak of the supercycle-sensation back in 2022.
Meanwhile, commodity producers continue to run tight capex discipline (meaning constrained supply growth), the index itself has established a fairly robust support level as you can see below, and there’s decent odds of a global growth reacceleration into 2025.
So on all counts I’d say things are looking up for commodities.
Key point: From super cycle to cyclical bear market, commodities are cheap again.
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