Investor flows into commodity-related investments have also picked up. In some markets, such as China, this renewed interest in real assets comes after poor performance of domestic financial markets for stocks and bonds and prospects of currency depreciation.
Elsewhere interest in real assets – including commodities – as a diversification or contrarian trade has increased.
Dollar direction has played a part in the recent rally, as has the Federal Reserve’s more dovish dots. Intimations of delays to US interest rate increases, against a backdrop where quantitative easing and negative interest rates are still being deployed by the European Central Bank and the Bank of Japan, prolong long-standing imbalances and bring an unwelcome resurrection of risk-on/risk-off trades.
While a better balance between supply and demand is part of the rationale for stronger commodity prices in 2016, more emphasis should be placed on financial factors related to the US dollar, arbitrage and investors’ interest in real assets.
Frances Hudson is global thematic strategist at Standard Life Investments
