Commodities had their best quarter in almost three years, driven by supply concerns and optimism over demand. Investors, though, might not want to get too cocky.
The outlook for demand is running into troubling signs in the U.S. and China, the two biggest consumers. In early March, China cut its goal for economic expansion, while a report last week showed U.S. growth cooled more than forecast.
“It’s hard to make the case that, overall, commodities can stay in this uptrend,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle, which oversees $164 billion. “Grains will have a tough time, and for industrial metals the underlying question is: what really is going on with China’s growth?"
In the first quarter, total returns for the Bloomberg Commodity Index of 23 raw materials rose more than 6 percent, the most since the three months ended in June 2016. Crude oil paced the advance, while nickel led gains in industrial metals. A surge in January propelled the index amid bets on resilient global economic and signs of tight supplies in many markets.
Optimism has wavered, with the index falling in March as manufacturing and auto sales data weaken from Europe to China and central banks look for ways to shore up their economies.
Still, even with the uncertainty, analysts say commodities demand has yet to fall out of bed, and supply concerns aren’t going away soon for many raw materials. Also, a dovish stance at the U.S. Federal Reserve on interest rates could ease dollar strength, underpinning demand. On Monday, the Bloomberg Commodity Index advanced as much as 0.6 percent after China’s first official economic gauge for March signaled a stabilization.
“The fundamental concerns remain on the supply side, with constraints for many commodities,” said Darwei Kung, a money manager at DWS Investment Management Americas Inc.’s $2.8 billion Enhanced Commodity Strategy Fund. “Capital investment necessary to expand capacity at a faster pace than demand was just not spent for the last several years.”
Oil and Gas
Oil prices stormed back in the first quarter, recovering from worries about a global oversupply that pushed crude into a nosedive to end 2018. The new year brought orchestrated production cuts by OPEC, Russia and other major suppliers, and the outlook for interest rates in the U.S. calmed investors.
“We’re in the later innings of an expansion: we’re not calling for a recession in 2019, but with the global growth slowdown, it’s not going to feel good in the second half for earnings and for global trade, even with a trade deal,” said Chad Morganlander, a money manager at Washington Crossing Advisors, which oversees $2.5 billion. “My belief is that oil prices will moderate.”