Tailwinds to stocks from commodities set to fade – CE

The rise in commodity prices has boosted some commodity-heavy stock markets. However, economists at Capital Economics suspect that it will run out of steam before long, limiting those stock markets’ gains over the next couple of years.

Stock markets of Norway, Canada Mexico and Australia have all outperformed global benchmarks this year

“We forecast that growth in China will continue to slow in the second half of the year as policy stimulus is withdrawn, weighing on demand for, and the prices of, industrial metals. And we expect oil production to ramp up over the next couple of years in response to the rise in prices we have already seen, ultimately weighing on the price of oil even as the global economy continues to recover rapidly.”

“We don’t think these countries’ stock markets will fall over the next couple of years. Most of them are heavily weighted toward sectors, such as financials, that are particularly sensitive to the health of the economy. And the outlook for economic growth, at least in the developed markets, is robust. The virus looks to be largely under control in Australia, Norway and Canada, and we forecast strong growth over the next few years in these countries.”

In the emerging markets, particularly in Latin America, the growth picture is more mixed, given the situation with the virus and varied degree of fiscal support provided to economies. But even there, the big picture is that we expect the virus to be brought under control (where it is not already), and for growth to pick up a bit before too long. And in Latin America, the non-commodities sectors of the stock markets are generally still below their pre-pandemic levels. This suggests to us that they still have further ground to regain as their economies recover from the effects of the virus and lockdowns.”

“We anticipate small, but positive, gains in most of these commodity-intensive stock markets over the next few years. We forecast annualised increases of 3-9% for the largest countries’ MSCI Indices between now and end 2023. This would be much less than recent gains in these stock markets, although it would not be too dissimilar from our forecast for the gain in the MSCI ACWI Index.”