Why this expert thinks commodities are about to rally again

This could be the time to be buying ASX resources shares as Citigroup believes commodities will outperform in the second half.

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Apprehension is creeping back into the market but this could be the time to be buying ASX resources shares as commodity prices are set to rally.

The bullish near-term outlook for hard commodities and energy was forecasted by Citigroup.

The prediction comes at a time when the BHP Group Ltd (ASX: BHP) share price, South32 Ltd (ASX: S32) share price and Woodside Petroleum Limited (ASX: WPL) share price have pulled back from their recent highs.

Commodity price and ASX mining shares disconnected

You can tell investors are getting jittery. Shares of ASX miners are being sold-off even on days when commodity prices jump.

Today’s one example as the Fortescue Metals Group Limited (ASX: FMG) share price and Rio Tinto Limited (ASX: RIO) share price are on the back foot. This is despite the iron ore price gaining 0.5% to around US$215 a tonne.

Investors don’t believe the good times will last and are reluctant to bid up ASX mining shares. Rising interest rates and the risk of runaway inflation are keeping buyers at bay.

Commodities could rebound in 2HCY21

But history is on the side of commodity bulls, according to Citigroup.

“Commodities naturally sell-off in recessions but rebound rapidly as economies recover,” said the broker. “The deeper the recession the stronger the recovery tends to be.”

Citi looked at recessions from the early 1990s and believes that commodities should continue to perform, if not outperform, in the second half of this calendar year. This is in part due to COVID-19 stimulus being unleashed to aid the economic recovery.

“We examine the performance of key US$ asset classes during the 6 [month] periods following global recessions,” said Citi.

“Notably, commodities outperformed equities, rates and credit indices on average, while the macro-sensitive industrial metals and energy complexes were the best-performing sectors within commodities during recoveries.”

ASX energy shares set to power up

Oil also outperforms and Citi noted a positive correlation between oil demand growth and GDP growth. The relationship is accentuated during “V-shaped” economic recoveries.

“Given the outsized weight of crude oil in commodity benchmarks and the energy intensity of mining and ag production, higher oil prices can accentuate a broader commodities rebound via cost inflation,” added Citi.

“Investor flows also improve substantially exiting steep recessions. In 2H’09, net inflows totalled ~$82Bn, including ~$42Bn to energy.

“This is consistent with the pattern we have seen YTD, where energy leads in sector performance and accounts for over half of the net inflows.”

Oil and copper look most bullish

The Brent oil price looks particularly well placed to rally, in the broker’s opinion. It also expects buyers to step in to buy the dip for copper.

If Citi is on the money, ASX energy and mining shares could outperform through to the end of this calendar year, if not beyond.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, Rio Tinto Ltd and South32 Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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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