Macquarie: ‘Buy commodities’

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  • Macquarie Bank thinks the US dollar and bonds will fall in the years ahead
  • Along with stronger global growth, it says now is a good time to consider buying into commodities
  • It points out that commodities have little to no correlation with stocks and bonds recently, something that it sees continuing

Macquarie Bank thinks the US dollar selloff is just getting started, even with an expectation that US bond yields will continue to surge.

And with stocks looking toppy and the global economy picking up steam, it has some simple advice for investors: buy commodities.

“As with most things in life, and in investing, timing is everything,” says Ric Deverell, Chief Economist at Macquarie.

“While bond prices are likely to fall in coming years, and equities are looking heavy, commodity prices have already had their bust with the moderation in the China-led Super Cycle, with most now back around longer run averages.

“In this world, we think the time for reconsidering commodities has come, with an allocation to commodities likely to add significantly to a balanced portfolio.”

Along with a diminishing list of alternatives and an expectation that the US dollar will weaken further, Deverell says that stronger global growth is a clear positive for commodities.

Source: Macquarie Bank

“Global growth has improved and looks more sustainable. While this does not mean that commodity prices will always go up, it does suggest a period of relative stability ahead, after the turmoil of the past few years,” he says.

“Unlike bonds, strong global growth will benefit commodities, with industrial commodities still giving good leverage to the industrial cycle.”

And if global growth continues to gather steam, helping to lift capacity utilisation and improve labour market conditions, it will likely lead to a boost in inflationary pressures, something Deverell says should benefit not only precious metals but broader commodity as well.

“In our view, the combination of strong growth, a large US fiscal stimulus and surging animal spirits has finally forced markets to begin to shake off the ‘secular stagnation’ shackles that dominated pricing in recent years,” he says, referring to economic conditions where both global growth and inflation were weak.

“While much of the focus is on the benefits of precious metals as an inflation hedge, gradually increasing inflation is also supportive for the industrial commodity complex, with commodities often the source of near term inflation, thereby providing an effective hedge.”

As for the risks posed by weakness in stocks and bonds spreading to the commodities complex, Deverell points to the chart below to show that there’s been very little correlation between either stocks or bonds to commodity prices over the past 15 years.

Source: Macqaurie Bank

He expects that trend will continue.

“Going forward we expect the correlation between commodities and equities, as well as commodities and bonds, to be very low,” he says.