Opinion is divided as to the outlook for commodities, with some suggesting the 2021-22 price bubble will continue to deflate given the sluggish outlook for economic growth globally. Such sentiment is perhaps holding sway because the sector is certainly looking good value. However, specific factors and longer-term trends suggest such concerns are overplayed. The portfolios have been adding to their exposure since the New Year. There is also one metal that perhaps deserves a special mention given both environmental considerations and the geopolitical outlook.
Sound fundamentals
Sentiment continues to trail the fundamentals. Commodity and energy companies usually trade at a market discount – the average having been around 25-30 per cent relative to the S&P 500 for several decades. The MSCI World Energy index is currently on a price/earnings ratio of 11-12 times. The market retains little faith in the sector. Economic concerns, and particularly the current woes in China, weigh heavily on investors’ minds. Of course, the sector hosts a broad range of metals and energy resources, each with their unique qualities and applications, but in aggregate valuations remain attractive relative to outlook.