Citi says commodities–agricultural commodities in particular–are due to a return to earth. While commodity stocks are largely driven by infrastructure investment in emerging markets, which remains strong, slowdowns in mature economies may begin to take their toll:
…one should be concerned about the effect of the U.S. recession’s lagged impact on production trends, not to mention weakening economic data in Europe and Japan.
Also of concern is the potential for a dollar rally. Commodities act as an important store of value when the greenback declines, but If it recovers, there’s a strong chance prices could suffer:
Any reversal in the greenback’s fortunes also could roil the generally bullish commodity price outlooks that we see around the investment community, with energy and agricultural products being the areas with the most dedicated investors/supporters.
Citi further argues that the themes and patterns surrounding the commodity boom are beginning to look eerily similar to those that accompanied the Internet crazy of the late 90’s:
The infrastructure/global growth theme marks about 30% of the stock market’s value. In the latter 1970s, the Energy sector soared to more than 30% of the S&P 500 total market capitalisation and the same thing happened in the Information Technology sector in the late 1990s. Moreover, some investors were worried in the 2005-2006 period when Financials got to more than 20% of the S&P 500’s market cap. Yet, the global growth theme is bordering on 30% now and few seem to be concerned, which raises our anxiety levels.
Agricultural Commodities and the companies associated with them are particularly inflated, says Citi:
Investors have become so thoroughly fascinated by the rising agricultural commodity prices, given the reactive nature of farmers looking to cash in on the associated profit potential. There are some scary similarities to the stock price activity of fertiliser and seed stocks relative to dot.com name back in the late 1990s. We remain very worried about these incredibly “crowded trades” that could unwind quickly.
Business Insider Emails & Alerts
Site highlights each day to your inbox.