A Wednesday research report from Citi analyst Maximilian Layton underscores a growing trend towards bullishness on copper prices and energy stocks. This is, of course, great news for the resource-heavy S&P/TSX Composite Index and domestic investors.
The title of Mr. Layton’s report effectively summarizes his optimism – “Why copper to $8,000/t isn’t far-fetched and evidence that crude and metals are the place to be for the ‘reflation trade’.” The current copper price of US$6,688 per tonne implies almost 20 per cent upside for the commodity price, based on his forecast.
The reflation trade refers to recent economic data showing a stronger-then-expected recovery in global manufacturing activity, and a subsequent increase in demand for raw materials. In copper, for example, the analyst expects global demand to exceed supply next year.
Mr. Layton’s colleague at Citi, U.S. equity strategist Tobias Levkovich, also recommended select materials sectors in a Monday report. ”We would think that autos [get] a significant pop, and that should coincide with demand for aluminum, steel, paints … housing also remains robust, filtering into strength for home appliances, lumber, floor coverings, and so on,” he said.
Domestically, Scotiabank strategist Hugo Ste-Marie’s monthly update on top performing market sectors noted that materials stocks gained price momentum and saw increased profit growth potential during second-quarter earnings season in August.
Futures markets indicate that hedge funds have already placed bullish bets on copper specifically. Weekly data from the Washington D.C.–based Commodity Futures Trading Commission shows that bullish speculative bets on the commodity price are reaching the 10-year peaks set in mid-2018. (Chart posted on social media here)
Metals and energy stocks have a lot of room to play catch up. So far in 2020, the S&P/TSX Diversified Mining Index trails the S&P/TSX Composite by more than 16 per cent. The energy sub-index lags the benchmark by more than 27 per cent.
The success of the commodity-based investment theme will depend on continued improvement in global economic data, but it appears to offer considerable upside if the recovery persists.
-- Scott Barlow, Globe and Mail market strategist
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