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Don’t look now but commodities have hit a historical milestone while the market was asleep

Commodities are the unsung heroes of the investment world. When most investors were distracted during this festive season, the asset class set a new world record by delivering its longest winning streak in history.

The Bloomberg Commodity Index, which is made up of 22 raw materials, notched its 15th consecutive trading day of gains and looks poised to make further advances.

If it was the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) breaking records, it would be all over the media. The fact is, not much fanfare has been made about this achievement even as some of our favourite resources stocks like Rio Tinto Limited (ASX: RIO), South32 Ltd (ASX: S32) and Santos Ltd (ASX: STO) have outperformed in 2017 on the back of the commodities bull run with each of the stocks surging between 25% and 35%.

Other big resources names that have outperformed the S&P/ASX 200 include Origin Energy Ltd (ASX: ORG), BHP Billiton Limited (ASX: BHP), Newcrest Mining Limited (ASX: NCM) and Oil Search Limited (ASX: OSH).

The winning streak in the raw materials index is driven by a few factors. This includes a weaker US dollar, historically low global interest rates, a ramp up in infrastructure spending in several countries (whether real or anticipated) and unexpected supply disruptions.
Many experts do not think last year’s gains in commodities will be repeated in 2018. This could be true as the second half of 2017 proved to be a golden run for the asset class.

Further, the US dollar could rebound this year as economic growth accelerates and interest rates are headed higher in the US and around the world.

Commodities are priced in US dollars and they tend to be inversely correlated with the greenback. Low interest rates have also allowed companies to expand (and consumer raw materials) using cheap debt, so rising interest rates could prove to be another headwind.

On the other hand, manufacturing activity in the major economies appear to be moving from strength to strength with the Eurozone manufacturing data setting records this week and US factory data on Wednesday beating expectations.

I think there is still enough left in the tank for the asset class to make modest gains over the next 12 months, and that is more than enough to trigger valuation upgrades across the sector.

This is one of the predictions I have made for the sector for the new year, which I believe isn’t yet reflected in current stock prices.

Resources isn’t the only likely winning game in town for 2018. The experts at the Motley Fool are bullish about this other sector and you can click on the link below to get your free report to find out what this sector is and the stocks to put on your watchlist for the year ahead.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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