Commodity prices have become relatively cheap after years of decline and underperformance post the global financial crisis. They are now at five-decade low in relation to stocks, a report by Edelweiss Securities noted.
"Commodity prices including energy and metals have been in a downtrend at least since 2011 with many trading at multiyear lows. In fact, the Core Commodity CRB Index is trading close to the levels seen at the beginning of this century," the report stated.
In 2020, the brokerage expects commodity prices to exit the downtrend which had its roots in the ‘Global Financial Crisis’ and a commodity reflation cycle to begin in the next few months.
It sees three key drivers of this commodity reflation:
1) US dollar is beginning to rollover. A weaker US dollar is likely to ease global tightness and trigger a commodity rebound as commodity prices and US dollar move in the opposite direction. It added that relatively higher EU growth and the US Federal Reserve's balance sheet expansion can also restrict the dollar rise.
2) Global growth which has been sliding slowly is beginning to stabilise and is likely to see a recovery in 2020. Further, supportive monetary and fiscal policies should also aid commodity recover, it said, adding that global PMIs are suggesting a stabalisation and probable revival.
3) Commodity markets, especially base metals appear cheap with low levels of inventory, poor growth in new discoveries and low capacity addition. Moreover, given the current tightness in the demand and supply scenario for most metals, the deep contango indicates the market's pessimism is reaching an extreme.
The report added that historically higher commodity prices have been accompanied by an uptick in global growth, especially for emerging markets, many of which are commodity exporters and that metals, energy and industrials sectors tend to benefit during such phases.
For Indian markets, the brokerage is focussed on NSE Metals Index which has moved very closely with the trend in global commodity markets and appears ripe for revival. The NSE Metal Index moves with copper to bond price ratio and stands to gain over the next few quarters and years, the report noted.
It further stated that commodity companies are likely to see improved financials and emerging markets are likely to outperform in the future.