GLOBAL WEEKLY COMMENTARY

Commodities rewired

Key points

A divergence of fortunes
The economic restart has lifted commodity prices. Beyond that, we see structural trends leading to a divergence of fortunes in different commodities.
Market backdrop
The International Monetary Fund has raised its global growth forecast to 6% in 2021. U.S. stocks hit record highs and yields traded below 14-month peaks.
Data watch
U.S. retail and consumer sentiment data will be in focus. Retail sales are expected to rebound from a cold weather-induced decline in February.

Oil and industrial metals have rallied since late-2020 on expectations for a swift economic restart, sparking talk of a new commodity “supercycle.” We see a more nuanced outlook – with a divergence across different commodities. The lift for oil from the economic restart is likely to be transitory, while some metals may benefit from structural trends such as the “green” transition for years to come, in our view.

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Chart of the week
Changes in crude oil and copper prices, 2020 and 2021 to date

Chart of the week: The chart shows Brent crude oil is the best performer among selected assets so far this year, while spot gold is the worst.

 

Sources: BlackRock Investment Institute, with data Refinitiv, April 2021. Notes: Crude oil prices are represented by the spot Brent crude oil prices, and copper prices are represented by the London Metal Exchange spot copper prices.

Oil and copper are among the best-performing assets so far this year - after divergent performance last year. See the chart above. The post-pandemic restart – not a typical business cycle recovery – suggests the economy’s snapback from the Covid shock will likely be much swifter than the recoveries in the past, in our view. Growth in China – the world’s top commodity consumer – is already back to its pre-Covid trend, and the U.S. is close behind. This dynamic has buoyed commodities in recent months, yet we expect the support to fade once the economy returns to a modest growth trend. We see long-term dynamics at play too. The strength in copper (see the orange bars) partly stems from a supply crunch that is the result of years of underinvestment and increased capital discipline among major miners – and exacerbated by production disruptions caused by the pandemic. In addition, a transition to a low-carbon economy has provided long-term support for copper. In contrast, oil suffered a collapse in demand last year as travel demand dried up. Near-term demand may well return – but peak oil demand looms large.

We see structural dynamics potentially leading to long-lasting – and divergent – impact on two groups of commodities. The first is oil and other fossil fuels. A strong economic restart may still support prices of oil and related assets in the near term. Yet the prospect of peak oil demand is now well accepted, and we see the “green” transition likely to erode oil demand over the long run. The second group – certain industrial metals including copper, nickel and lithium – looks set to enjoy structural demand from that very transition for years to come. Decarbonization of the power system and electrification of the transport sector, for example, will be massive endeavors requiring a large-scale buildout of new infrastructure. At the same time, the increased focus on sustainability could make new mining projects more expensive and time-consuming to build, potentially aggravating the supply shortage and driving prices higher to incentivize greater production.

China’s commodity consumption was the key driver of the last commodities “supercycle” in the early 2000s – but this time may be different. We see more broad-based demand for industrial metals across developed and emerging markets (EM), thanks to a global policy revolution in response to the Covid shock and structural demand due to massive government spending on renewable energy and infrastructure. A remapping of global supply chains could also boost demand for raw materials as companies build facilities in new locations to increase their resilience to disruptions.

The bottom line: The powerful economic restart is likely to support many commodities in the near term, including oil. This should benefit the assets of commodity exporters, including some EMs. But the support from the powerful restart will be transitory, and we do not see a broad-based rise in global demand that buoys all commodities. Instead, we see a divergence story: The “green” transition will eventually erode demand for fossil fuels, potentially cutting short the duration of any price upswing. At the same time it looks likely to create structural demand for many industrial metals that may last for decades to come. Investing in commodities isn’t straightforward for most individual investors. Commodity-related equities is an option, yet there are risks specific to equity markets. Overall, our climate-aware return assumptions place energy and utilities sectors as laggards in long-term performance and expect technology and healthcare to benefit the most from the “green” transition, judging by their exposure to climate risks and opportunities. Over the tactical horizon, we tilt toward cyclicality and maintain a bias for quality. We are overweight U.S., emerging market and UK equities, as well as global high yield credit.

A smaller shortfall
The latest IMF forecast implies a smaller cumulative activity shortfall for the U.S. Read why in our macro insights.
BlackRock Investment Institute Macro insights

Assets in review
Selected asset performance, 2021 year-to-date and range

Chart: Selected asset performance, 2021 year-to-date and range

 

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of April 8, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI Europe Index, MSCI USA Index, MSCI Emerging Markets Index, the ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, Refinitiv Datastream Italy 10-year benchmark government bond index,, Refinitiv Datastream Germany 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, J.P. Morgan EMBI index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

Market backdrop

U.S. stocks hit new record highs and 10-year Treasury yields traded below the 14-month peak. The International Monetary Fund (IMF) raised its forecast for global growth to 6% for this year - the highest since the 1970s – citing unprecedented public spending especially in the U.S.  We expect equities and other risk assets to be supported by the new nominal – a more muted response of government yields to stronger growth and higher inflation than in the past as central banks lean against any sharp yield rises.

Week ahead

April. 12-19 – China total social financing and new yuan loans
April. 13 – Germany ZEW Indicator of Economic Sentiment
April. 15 – U.S. Philly Fed business survey, retail sales, industrial production
April. 16 – University of Michigan Surveys of Consumers; China industrial output

U.S. retail and consumer sentiment data will be in focus. Retail sales were expected to rise 4.7% in March after falling in the previous month, partly due to cold weather, according to a Reuters poll. The University of Michigan survey could shed light on consumer sentiment, after the lifting of restriction in some states and additional relief payment from the government.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, April 2021

Asset Strategic view Tactical view
Equities Strategic equities - neutral Tactical view - neutral
We are overweight equities on a strategic horizon. We see a better outlook for earnings amid moderate valuations. Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indexes. Tactically, we stay overweight equities as we expect the restart to re-accelerate and interest rates to stay low. We tilt toward cyclicality and maintain a bias for quality.
Credit Strategic equities - neutral       Tactical view - neutral
We are underweight credit on a strategic basis as valuations are rich and we prefer to take risk in equities. On a tactical horizon, credit, especially investment grade, has come under pressure from tightening spreads, but we still like high yield for income.
Govt Bonds Strategic equities - neutral Tactical view - neutral
We are strategically underweight nominal government bonds as their ability to act as portfolio ballasts are diminished with yields near lower bounds and rising debt levels may eventually pose risks to the low-rate regime. This is part of why we underweight government debt strategically. We prefer inflation-linked bonds as we see risks of higher inflation in the medium term. We are underweight duration on a tactical basis as we anticipate gradual increases in nominal yields supported by the economic restart.
Cash Tactical view - neutral                             Tactical view - neutral
We use cash to fund overweight in equities. Holding some cash makes sense, in our view, as a buffer against supply shocks driving both stocks and bonds lower.
Private markets Strategic equities - neutral Tactical view - neutral
We believe non-traditional return streams, including private credit, have the potential to add value and diversification. Our neutral view is based on a starting allocation that is much larger than what most qualified investors hold. Many institutional investors remain underinvested in private markets as they overestimate liquidity risks, in our view. Private markets are a complex asset class not suitable for all investors.

Notes: Views are from a U.S. dollar perspective, April 2021. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2021

Legend Granular
Equities

Asset Tactical view
United States United States
We are overweight U.S. equities. We see the tech and healthcare sectors offering exposure to structural growth trends, and U.S. small caps geared to an expected cyclical upswing in 2021.
Europe Europe
We are neutral European equities. We believe the broad economic restart later in the year will help narrow the performance gap between this market and the rest of the world.
Japan
Japan
We are underweight Japanese equities. Other Asian economies may be greater beneficiaries of a more predictable U.S. trade policy under a Biden administration. A stronger yen amid potential U.S. dollar weakness may weigh on Japanese exporters.
Emerging markets Emerging markets
We are overweight EM equities. We see them as principal beneficiaries of a vaccine-led global economic upswing in 2021. Other positives: our expectation of a flat to weaker U.S. dollar and more stable trade policy under a Biden administration.
Asia ex-Japan Asia ex-Japan
We are overweight Asia ex-Japan equities. Many Asian countries have effectively contained the virus – and are further ahead in the economic restart. We see the region’s tech orientation allowing it to benefit from structural growth trends.
UK UK
We are overweight UK equities. The removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome erode. We also see UK large-caps as a relatively attractive play on the global cyclical recovery as it has lagged peers.
Momentum Momentum
We keep momentum at neutral. The factor has become more exposed to cyclicality, could face challenges in the near term as a resurgence in Covid-19 cases and a slow start to the vaccination efforts create potential for choppy markets.
Value
Value
We are neutral on value despite recent underperformance. The factor could benefit from an accelerated restart, but we believe that many of the cheapest companies – across a range of sectors – face structural challenges.
Minimum volatility Minimum volatility
We are underweight min vol. We expect a cyclical upswing over the next six to 12 months, and min vol has historically lagged in such an environment.
Quality
Quality
We are overweight quality. We like tech companies with structural tailwinds and see companies with strong balance sheets and cash flows as resilient against a range of outcomes in the pandemic and economy.
Size
Size
We are overweight the U.S. size factor.  We see small- and mid-cap U.S. companies as a key place where exposure to cyclicality may be rewarded amid a vaccine-led recovery.

Fixed income

Asset Tactical view
U.S. Treasuries     U.S. Treasuries
We are underweight U.S. Treasuries. We see nominal U.S. yields rising but largely due to a repricing higher of inflation expectations. This leads us to prefer inflation-linked over nominal government bonds.
Treasury Inflation-Protected Securities Treasury Inflation-Protected Securities
We are overweight TIPS. We see potential for higher inflation expectations to get increasingly priced in on the back of structurally accommodative monetary policy and increasing production costs.
German bunds                                                      
    Europe
We are neutral on bunds. We see the balance of risks shifting back in favor of more monetary policy easing from the European Central Bank as the regional economic rebound shows signs of flagging.
Euro area peripherals Japan
We are neutral euro peripheral bond markets. Yields have rallied to near record lows and spreads have narrowed. The ECB supports the market but it is not price-agnostic - its purchases have eased as spreads have narrowed.
Global investment grade Global investment grade
We are underweight investment grade credit. We see little room for further yield spread compression and favor more cyclical exposures such as high yield and Asia fixed income.
Global high yield 
Global high yield
We are moderately overweight global high yield. Spreads have narrowed significantly, but we believe the asset class remains an attractive source of income in a yield-starved world.
Emerging market - hard currency Emerging market - hard currency
We are neutral hard-currency EM debt. We expect it to gain support from the vaccine-led global restart and more predictable U.S. trade policies.
Emerging market - local currency Value
We are neutral local-currency EM debt. We see catch-up potential as the asset class has lagged the risk asset recovery. Easy global monetary policy and a stable-to-weaker U.S. dollar should also underpin EM.
Asia fixed income 
Asia fixed income
We are overweight Asia fixed income. We see the asset class as attractively valued. Asian countries have done better in containing the virus and are further ahead in the economic restart.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

 


Read details about our investment themes and more in our 2021 Global outlook.

The New Nominal

 

Our new nominal theme – that nominal yields will be less sensitive to expectations for higher inflation – has been confirmed by the Fed’s March policy meeting. The Fed made it clear that the bar for reassessing its policy rate path was not met and that it was too soon to talk about tapering bond purchases, while embracing a material improvement in its outlook. We believe this clear reaffirmation of its commitment to be well “behind the curve” on inflation and to wait to see it move above target has helped the Fed regain control of the narrative – for now.

    • We believe the recent rise in nominal government bond yields, led by real yields, is justified and reflects markets awakening to positive developments on the faster-than-expected activity restart combined with historically large fiscal stimulus – all helped by a ramp-up in vaccinations in the U.S.
    • We expect short-term rates will stay anchored near zero, supporting equity valuations. The Fed could be more willing to lean against rising long-term yields than the past, yet the direction of travel over the next few years is clearly towards higher long-term yields. We see important limits on the level of yields the global economy can withstand.
    • Market implication: We favor inflation-linked bonds amid inflationary pressures in the medium term. Tactically we prefer to take risk in equities over credit amid low rates and tight spreads.
Globalization

 

Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-China world order and a rewiring of global supply chains, placing greater weight on resilience.

    • The Biden administration is engaging in strategic competition with China, particularly on technology, and has criticized Beijing on human rights issues. The tensions were on display in a bilateral diplomatic meeting in Alaska.
    • We see assets exposed to Chinese growth as core strategic holdings that are distinct from EM exposures. There is a case for greater exposure to China-exposed assets for potential returns and diversification, in our view.
    • We expect persistent inflows to Asian assets as we believe many global investors remain underinvested and China’s weight in global indexes grows. Risks to China-exposed assets include China’s high debt levels and U.S.-China conflicts, but we believe investors are compensated for these risks.
    • Market implication: Strategically we favor deliberate country diversification and above-benchmark China exposures. Tactically we like Asia ex-Japan equities, and see UK equities as an inexpensive, cyclical exposure.
Turbocharged transformations

 

The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality within and across nations, and the dominance of e-commerce at the expense of traditional retail.

    • The pandemic has focused attention on underappreciated sustainability-related factors and supply chain resilience.
    • It has also accelerated “winner takes all” dynamics that have led to the strong performance of a handful of tech giants in recent years. We see tech as having long-term structural tailwinds despite its increased valuations, yet it could face challenges from higher corporate taxes and tighter regulation under a united Democratic government.
    • The pandemic has heightened the focus on inequalities within and across countries due to the varying quality of public health infrastructure – particularly across EMs – and access to healthcare.
    • Market implication: Strategically we see returns being driven by climate change impacts, and view developed market equities as an asset class positioned to capture the opportunities from the climate transition. Tactically we favor tech and healthcare as well as selected cyclical exposures.
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Wei Li, Managing Director, is head of EMEA investment strategy for BlackRock ETF and Index Investments.
Ben Powell
Chief Investment Strategist for APAC — BlackRock Investment Institute
Axel Christensen
Chief Investment Strategist for LatAm & Iberia – BlackRock Investment Institute
Axel Christensen, Managing Director, is Chief Investment Strategist for LatAm & Iberia for BlackRock. He is also a member of the Latin America & Iberia Executiv