Investment specialist: ASX to buckle in for the commodity bull market of a lifetime

Online trading and investment specialist Saxo Bank’s Q1 2021 outlook offers a bright outlook for ASX commodity shares. We look at why.

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Online trading and investment specialist, Saxo Bank, says the stars are aligning to launch a commodity bull market you’ll be telling your kids about. Let’s take a closer look at what this really means and how a commodity bull market would impact ASX shares. 

According to Saxo’s Q1 2021 Quarterly Outlook for global markets, there have only been 7 true commodity bull markets over the past 277 years. The one they’re convinced is now shaping up could well define the 2020’s investment climate.

What’s driving the nascent commodity bull market?

According to Steen Jakobsen, Chief Economist at Saxo Bank, “A commodity bull market is part and parcel of a new secular inflationary regime”.

Inflation? But aren’t we in a low inflationary, or even deflationary, environment?

Not if you dig deeper into the official figures, says Eleanor Creagh, Australian Market Strategist for Saxo Bank:

Globalisation, a debt super cycle and the rise of technology (the Amazon effect) have all contributed to disinflationary forces, but these dynamics have been overrepresented in official measures and hide the real inflation that exists today.

Creagh points out that contrary to official government inflationary figures, housing, healthcare, education, childcare, shares, and bonds have all inflated.

Most Australians are well aware of how high housing prices have gone over the past decade.

US shares are another area where you can really see asset price inflation at work. Creagh says, “The average US worker must now work 141 hours to buy one share of the S&P 500, a fresh record. In the 1980s it took less than 20 hours to purchase that same share”.

Driving this hidden inflation, she says, are the “expansionary, unconventional monetary policy measures [which] have been deployed repeatedly in recent years”.

Saxo’s report highlights that these expansionary and unconventional policies have only ramped up in the face of the global COVID-19 response. As governments focus on battling rising inequality and transitioning to clean energy, Saxo expects to see more of the same in the years ahead.

Supply and demand

Other major factors Saxo sees driving the next commodity bull market include growing populations, particularly in India. India’s population is set to exceed 1.5 billion by 2030. More than half of its citizens under the age of 30. That’s expected to cause a significant increase in the demand for resources.

There’s also the global shift to green energy. Among other potential beneficiaries are copper producers, with electric vehicles needing 4 times more copper than combustion engine cars.

But Jakobsen isn’t bearish on the outlook for traditional energy shares either, saying:

Even the price of fossil fuels themselves is likely set to rise steeply, as few dare to invest in them anymore… Investment into energy is now less $300 billion a year, down from $900 billion a decade ago, and remember that those $300 billion need to meet an ever-increasing demand for electricity.

Then there’s the coming wave of new investment in infrastructure. Saxo says that the shift to online retailing has yet take into account the required machinery and infrastructure to support the fast growing industry.

How to make money in the real world of 2021

According to Jakobsen, 2021 is seeing this all come to a head as government’s “policy focus drifts away from the traditional focus on ensuring financial stability to one that demands social stability above all else.”

He adds, “The social stability paradigm has three main objectives: to reduce inequality (and through it, increase demand), the green transformation, and the improvement of infrastructure”.

2021 for us is the year where the narrative of a greener, government-supported transformation of the social paradigm meets the reality of too little supply, inadequate infrastructure, and a business world that has been so busy getting digital and virtual that they forgot the real physical world. You can have the world’s best product online and sell millions of units, but if you cannot produce, ship and deliver it, good luck making a return.

Just as Covid-19 reminded us of how vulnerable our perhaps over-tuned economy is to disruption, 2021 will remind us of how we need to live, act and make money in the real world.

What does a commodity bull market mean for ASX shares and investors?

According to Eleanor Creagh:

With Treasury yields rising and the [US] dollar trending lower, emerging markets, Asia, commodities and bets on higher inflation are the place to be, as reflation becomes the name of the game…

As the world recovers from the depths of this crisis, growth will accelerate alongside inflation, while the financial system remains awash with new money; the asset allocation to commodities must be higher.

Huge supply deficits with structural underinvestment, green transformation tailwinds, and the engines of a weaker dollar plus higher inflation will coincide with a historic underweighting and a multiyear bear market to bring a commodity renaissance in 2021.

If a historic commodity bull market is indeed shaping up before out eyes, Australian investors are well positioned to take advantage. There’s certainly no shortage of commodity shares trading on the ASX.

Key ASX players

Santos Ltd (ASX: STO) may benefit from any increase in fossil fuel energy prices, Jakobsen forecasts. Despite falling hard today, the Santos share price is up 6.7% in 2021 so far. It remains 20% down from this time last year.

If copper prices are heading higher with the global infrastructure and clean energy splurge. That should spell good news for companies like OZ Minerals Limited (ASX: OZL). Oz Minerals’ share price also plunged today, leaving it down 1.5% in 2021. Over the past 12 months, the Oz Minerals share price is up 95%.

We’ll leave off with BHP Group Ltd (ASX: BHP). BHP is among the world’s leading producers of iron ore, metallurgical coal, and copper. The BHP share price, also fell hard today. However, it is up 4.6% in 2021 and up more than 15% over the past 12 months.

Of course, there are many more commodity shares for you to investigate in Australia’s commodity heavy index!

Happy investing.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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