Analyst Weekly – Commodities at a crossroads


Focus: Commodities at a crossroads

Commodities are at a cross-roads after big 26% rally this year, with risks from China’s slowdown and virus third wave. We see Chinese demand stabilizing and green-transition impact picking up. Commodities are in a rare sweet-spot of strong demand, tight supply, and rising investor demand, on inflation and weaker USD outlooks. This is seen in the recent NatGas and Aluminium surges, for example. We favour industrial metals, energy, and ag, with precious lagging. Related Smart Portfolios include @RenewableEnergy, @OilWorldWide, @GoldWorldWide.

Markets remain on edge

It was another nervy week, with cross-currents of better-than-feared US inflation and retail sales, but with mounting China slowdown and property risks. We see markets well-supported, with some volatility to be expected, but growth concerns to ease. Japanese equities continued their election driven rally, whilst Hong Kong and Brazil were weaker. Real estate and utilities softened as US bond yields inched up. See our global markets presentation here for background.

Average returns rarely happen

S&P 500’s average annual return is 8.6%, but hardly ever seen. The implications from this are: 1) focus on the direction (up) not exact forecast; 2) avoid the small number of big drawdowns, and that 3) markets rise 3/4 the time.

Biggest ever DAX index change

Germany’s main DAX equity index has its biggest ever overhaul Sept. 20th, growing from 30 to 40 stocks, but keeping its cyclicals focus.

Surprise tech performer

Comparing big tech across the world surprisingly shows Europe – from ASML to CAP – as the best performing and most expensive. Whilst China tech may not be cheap enough, with valuations still similar to the well positioned US FAANGM’s. EM ex China tech is the cheapest.

Crypto recovery led by altcoins

Bitcoin (BTC) continued its recovery from the prior week ‘flash crash’. It’s c65% price return this year is by far the most of all asset classes. Cinema chain AMC (AMC) will now accept crypto in latest sign of broadening acceptance. Altcoins TRON (TRX) and Aave (AAVE) were among best weekly performers, respectively boosted by NFT demand and new-project conjecture.

China fears are the commodity focus

China’s weaker-than-feared August economic data and potential bankruptcy of big property company Evergrande (03333.HK) hit confidence in world’s no.1 commodity importer.

The week ahead: Central Bank week

1) Fed meets (Wed) with focus on tapering timing, and with UK, Japan, and China central banks also meeting.

2) Global PMI data (Thu) will provide a timely update on the growth outlook in US, Europe, UK, and Japan.

3) Key upcoming elections in Canada (20th) and Germany (26th).

4) Busier earnings week with reports from sector leaders ADBE, FDX, NKE, and COST.

Our key views: Staying the course

We see a positive outlook of 1) vaccine rollout and economic re-opening, and 2) still huge policy support, offsetting virus third wave and Fed tightening risks. We like assets helped by this growth: equities, commodities, crypto, and are cautious fixed income, and the USD.

Top Index Performance

1 Week 1 Month YTD
DJ30 -0.07% -1.52% 13.00%
NASDAQ -0.57% -0.20% 18.02%
SPX500 -0.47% 2.24% 16.73%
UK100 -0.93% -1.75% 7.79%
GER30 -0.77% -2.01% 12.91%
JPN225 0.39% 12.91% 11.13%
HKG50 -4.90% 0.29% -8.48%

*Data accurate as of 20/09/2021

Market Views

Markets remain on edge

  • Another nervy week, with cross-currents of better-than-feared US inflation and retail sales, but mounting China slowdown and property risks. S&P 500 fell by 0.6%. We see markets well supported, with some volatility to be expected, but growth concerns to ease. Japanese equities continued there election-driven rally, whilst Hong Kong and Brazil were weaker. Real estate and utilities softened as US bond yields inched up to 1.37%. See our latest global markets summary presentation here for background.

Average returns rarely happen

  • The S&P 500 has averaged an 8.6% price return over the last fifty years but has only come close to this less than a tenth of the time (see chart). It is much more likely to significantly miss, either by being negative or by surging over 20%. The implications from this are: 1) to focus on the direction (up) rather than exact number of our index target; 2) to avoid the small number of very big drawdowns, and 3) markets historically rose three-quarters the time.

Biggest ever overhaul of Germany’s DAX

  • Germany’s main equity index, the DAX, has its biggest ever overhaul on Monday, September 20th, growing from 30 to 40 stocks. With over $9 trillion tracking equity indices globally, such changes matter. This is a welcome DAX update, adding diversification, from online stock Zalando (ZAL.DE) to health-techs like Qiagen (QGN.DE), but keeping the German index’s attractive and distinctive cyclical character.
  • It’s unfashionable, with many hoping for more US-style tech exposure, but we think is an asset in today’s cyclical GDP rebound, and the DAX has beaten global equities over the long term.

The surprise best-tech performer

  • We made indexes of the biggest tech stocks in US, Europe, China, and rest of Emerging Markets (EM). US and China tech is focused on online platforms; rest of EM hardware focused; Europe diversified across semis, software, and payments. This gives different performance, profit margin, and valuation characteristics.
  • Broad ‘tech’ (counting IT, Communications, and Consumer Discretionary all together) is by far the largest listed segment in the US and China, at 52-58% of the market versus 42% in EM ex China and ‘only’ 25% in Europe.
  • Europe tech (from ASML and SAP.DE to IFX.DE and CAP.PA) is the surprise from our analysis, as both the best performer and the most expensive. China is not cheap enough yet, and the US FAANGM’s seem particularly well-placed.

Brazil back to the bad old days

  • Assets in Brazil (EWZ), world’s no.8 sized economy, have sharply underperformed, along with developed-market proxies like the ESP35, facing multiple growth and political challenges. But is now 2nd only to perennial Russia as the world’s cheapest market (8.8x P/E ratio), with some of the lowest earnings growth forecasts next year (-9%), and currency (BRL) at a 40% discount to a basket of closest trading partners.
  • A strong tech-led IPO boom is giving many new bottom-up investing opportunities, from XP (XP), to Stone (STNE), and Pagseguro (PAGS).

Average ranked S&P 500 price returns (1971-2021)

Average ranked S&P 500 price returns

Crypto recovery led by altcoins

  • Bitcoin (BTC) continued it’s recovery from the prior week ‘flash crash’. It’s c65% price return this year is by far the most of all asset classes. Cinema chain AMC (AMC) will now accept crypto in the latest sign of broadening acceptance. Leading hedge funds Bridgepoint and Brevan Howard reiterated their interest in crypto, as institutional investor interest builds.
  • TRON (TRX) and Aave (AAVE) were among the best performing coins last week, taking there performance well over 300% this year. TRX was boosted by surging NFT demand, whilst crypto lending and borrowing protocol AAVE rallied ahead of a soon-to-launched project.

China the main commodity focus

  • The broad Bloomberg commodity index rose 0.5% last week, resilient to the stronger USD and China to sell oil from its strategic reserve to contain rising prices. Oil is +16% the last month.
  • China’s August economic data came in weaker than-feared across the board, led by the consumer. Slowdown fears in the world’s largest commodity importer were also stoked by troubles at largest listed property company Evergrande (03333.HK) and its $300 billion debt load. We see China on-track for its targeted 6% GDP growth this year, and with policy flexibility to support the economy further. Chinese interest rates and bank-reserve requirements remain some of the world’s highest.

US Equity Sectors, Themes, Crypto assets

1 Week 1 Month YTD
IT -0.60% 2.78% 20.95%
Healthcare -0.16% -0.36% 14.91%
C Cyclicals 0.18% 3.53% 12.57%
Small Caps 0.42% 3.62% 13.27%
Value -0.34% -1.00% 15.57%
Bitcoin 3.52% 4.45% 64.33%
Ethereum 2.34% 11.60% 353.06%

Source: Refinitiv

The week ahead: Central Bank week

  1. The US Fed meeting (Wed) and its new macro forecasts, in focus as consider tapering back $120bn/month bond purchases as a prelude to hiking interest rates. China, Japan, and UK central banks also meet in a busy policy week.
  2. Purchasing manager indices (PMI) from US, Europe, UK, Japan, Australia (Thu) give a timely update of pressures on global growth from the latest virus wave. US composite last at 55.4.
  3. Global virus response in focus at UN General Assembly week. 43% world population had one vaccination, but only 2% in poor countries, Also, important elections in Canada (20th) and SPD set for historic victory in Germany (26th).
  4. Busier earnings week including sector leaders Adobe (ADBE), Fedex (FDX), Nike (NKE), Costco (COST) and meme-stock Blackberry (BB). Germany’ DAX expands to 40 companies (20th).

Our key views: Staying the course

  • A positive scenario of 1) global vaccine rollout and economic re-opening, 2) still large support of low interest rates and fiscal spending.
  • The main risk is Fed policy tightening, which we see as gradual and well-flagged. Also. risks from 3rd virus wave, which has peaked already.
  • We focus on cyclical assets that benefit most from the rebound: commodities, crypto, small cap, and value. We are more cautious on fixed income, the USD, defensive equities and China.

Fixed Income, Commodities, Currencies

1 Week 1 Month YTD
Commod* 0.45% 7.01% 24.97%
Brent Oil 3.48% 16.14% 45.96%
Gold Spot -1.92% -1.61% -7.77%
DXY USD 0.72% -0.27% 0.34%
EUR/USD -0.69% 0.24% -3.99%
US 10Yr Yld 3.00% 11.02% 45.21%
VIX Vol. -0.67% 12.12% -8.53%

Source: Refinitiv. * Broad based Bloomberg commodity index

Focus of Week: Commodities at a cross-roads

After strong performance this year, commodities now face virus and China challenges

Commodities have been amongst the best performing asset classes this year, with the broad-based Bloomberg commodity index up 26%. Commodities are in a ‘sweet spot’ of rebounding demand, tight supply after a decade of under-investment, and investor interest driven by the outlook for high inflation and a weaker USD. A slowdown in China’s growth and the virus infection third wave is creating short term headwinds, reflected in our yellow ‘traffic-light’ allocation outlook. Chinese policy stimulus will ultimately respond though, supporting prices in the medium term. Commodities have been a poor long-term investment, requiring caution, but we see more upside, focused on industrial metals, energy, and ag, with precious to continue lagging. Our retail investor survey showed commodities marked for more inflows.

Chinese demand and carbon-transition are the two key price drivers

Commodity demand is led by China, by far the world’s largest importer, and by the carbon transition, which is boosting demand for some – like battery materials – and cutting investment into others – such as energy. Chinese growth has been slowing and property market concerns have added risks, but on-track for its 6% GDP growth target and with room for more stimulus. Chinese interest rates and bank-reserve requirements are some of world’s highest. Meanwhile, the lower investment caused by environmental concerns is counter-intuitively boosting prices. Oil drilling is half pre-crisis levels despite the price recovery.

Anatomy of two recent price surges: natural gas and aluminium

Natural gas prices have surged on unusually strong summer demand and supply disruptions – the latest from Hurricane Ida. Prices may head higher on winter peak demand, and with US gas drilling 20% below pre-crisis levels. But prices will fall as new supply responds to high prices. This will help LNG exports to Europe and Asia where shortages are intense. Gas stocks to benefit include Antero (AM), Cabot (COG), and EQT (EQT) and ETFs like services (OIH) and master limited partnerships (AMLP). Similarly, aluminium prices are the highest in a decade, on booming demand, from cans to cars, and rising supply risks – such as coup in no2 bauxite (a precursor to aluminium) producer Guinea. As the most energy intensive of commodities, it is seeing Chinese capacity cutbacks. This balances the threat of high prices denting demand and helping substitutes. Stocks like Norsk Hydro (NHY.OL), Alcoa (AA) and bauxite miners Rio Tinto (RIO), are exposed.

What to own – physical or stocks

Commodity stocks offer more choices (specific commodities or diversified producers) than the physical,  whilst giving dividend income, and with operating leverage to higher prices (as profits rise faster than  revenues). Available Smart Portfolios include @RenewableEnergy, @OilWorldWide and @GoldWorldWide.

Commodities price performance year-to-date %

Commodities price performance year-to-date


Key Views

The eToro Market Strategy View
Global Overview Positive scenario of 1) global vaccine rollout and economic re-opening, 2) support from low interest rates and government spending. Main risk is from US Fed monetary policy tightening, but will be well-signalled and very gradual. Economies are increasingly resilient new virus case ‘waves’. Focus on most growth sensitive assets: equities, commodities, crypto, small cap and value. Relative caution on fixed income, USD, defensive equities and China.


Traffic lights* Equity Market Outlook
United States World’s largest equity market (55% of total) seeing strongest GDP recovery in 30-years driving earnings upside ‘surprise’, and a rare third consecutive year of 10%+ equity market returns. Valuations at 21x P/E are 25% above historic levels but supported by still low bond yields and strong earnings growth outlook. See further cyclicals and value catch-up, after a decade of underperformance, whilst tech is well supported by its structural growth outlook.
Europe & UK A big beneficiary of the global growth rebound. Helped by 1) a greater weight of sectors most sensitive to the growth rebound, and lack of tech, 2) 25% cheaper valuations than the US, 3) a decade of under performance has made under-owned by global investors. Combination of lower-for-longer ECB plus multi-year €750bn ‘Next Generation’ government spending to drive European GDP and earnings growth more than the US, for the first time in a decade.
Emerging Markets (EM) China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China has world’s strongest GDP growth, and benefitted from being ‘first in, first out’ of crisis, but its tech sector crackdown is hurting the market. LatAm and Eastern Europe have more upside to vaccine rollouts, global growth recovery and higher commodities.
Other International (JP, AUS, CN) Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt.


Traffic lights* Equity Sector & Themes Outlook
Tech The broad ‘tech’ sector of IT, communications, and parts of consumer discretionary (Amazon, Tesla), dominates US and Chinese markets. Expect a more subdued 2021 after dramatic 2020 rally. But are structural stories with good growth, high profitability, and clean balance sheets that justify high valuations, and should continue to rise.
Defensives Healthcare, consumer staples, utilities, and real estate sectors traditionally offer more defensive cash flows, less exposed to changes in economic growth. This has also made them more sensitive to rising bond yields. We expect them to relatively underperform in the current cyclicals focused environment with growth and earnings strong.
Cyclicals We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead market performance. They are most sensitive to the sharp economic recovery and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and have been out-of-favour for many years.
Financials Financials will benefit from the GDP growth recovery, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields outlook, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators recently giving flexibility to pay large 8-10% dividend and buyback yields.
Themes We favour small cap vs large, on more GDP growth exposure, earnings upside, and domestic focus. Similarly, value over growth on GDP recovery, lower valuations, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return.


Traffic lights* Other Assets
Currencies We see modest USD weakness as the rest-of-world GDP growth recovery accelerates, and fears over a virus ‘third wave’ ease. A stable or weaker USD traditionally supports Emerging Markets, commodities, and large US foreign earners, such as the tech sector, and could be a modest headwind to large exporters, such as Europe.
Fixed Income US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity.
Commodities Commodities supported by record-breaking GDP growth rebound, ‘green’ industry demand, years of supply underinvestment, and a stable or weaker USD. Industrial metals (copper) and battery materials seem best positioned, whilst oil price supported by only slow return of OPEC+ supply. Gold hurt by outlook for higher bond yields.
Crypto Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade.


*Methodology: Our guide to where we see better risk-adjusted outlook. Not investment advice.
Positive Overall positive view, and expected to outperform the asset class on a 12-month view.
Neutral Overall neutral view, with elements of strength and weakness on a 12-month view
Cautious Overall cautious view, and expected to underperform the asset class on a 12-month view

Source: eToro

Analyst Team

Global Analyst Team
CIO Gil Shapira
Global Markets Strategist Ben Laidler
United Kingdom Adam Vettese
Mark Crouch
Simon Peters
France Antoine Fraysse Soulier
David Derhy
Iberia/LatAm Javier Molina
Italy Edoardo Fusco Femiano
Poland Pawel Majtkowski
Romania Bogdan Maioreanu
Asia Nemo Qin
Marco Ma
Australia Josh Gilbert



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