Market Views: Top commodities to watch in H2
The upcoming US presidential election, ongoing energy transition, and delicate supply-demand balance could significantly sway the performance of key commodities.
Metals essential for the energy transition - such as those used in electric vehicles (EVs) and renewable energy infrastructure - are in the spotlight amid the sustainability drive. Yet some warn of a looming disconnect between financial flows and physical demand.
Gold continues to reach new highs as a safe haven amid uncertainties surrounding the US election, persistent inflation, and currency fluctuations.
The oil market is another area of focus, with geopolitical tensions in the Middle East and potential supply disruptions threatening market volatility.
Digital assets like Bitcoin are quickly becoming viable options for mainstream institutional investors, reflecting a growing diversification appetite and a keen interest in leveraging technological advancements.
As investors prepare to navigate the second half, we asked asset managers and specialists to share their insights on the commodities on their radars.
The following responses have been edited for clarity and brevity.
Marcella Chow, global market strategist
JP Morgan Asset Management
When both stocks and bonds are correcting amidst geopolitical risks, stickier-than-expected inflation, and inflation-related cost shocks, commodity strategies could stand as a distinct asset class with returns that are largely independent of stock and bond returns.
Among these, gold continues to be viewed as a safe haven asset and portfolio diversifier.
It has risen 19% year-to-date as there have been shifts in the supply and demand dynamics.
Global central banks and other quasi-official institutions increased their gold purchases due to increasing concerns about potential US dollar weakness in the medium term.
We also see solid retail demand for physical gold from India and China, especially amid China’s sluggish property and equity market.
However, despite the recent outperformance in gold, investors should recognise the role of gold within their portfolios.
As gold’s volatility has sometimes been as high as emerging market equities, solely owning gold may not necessarily be the perfect hedge against volatility.
Meanwhile, other than gold, copper demand growth continues to accelerate due to robust energy transition demand, particularly grid, electric vehicles (EV) and renewables.
Coupled with various additional applications including data centers to support the ongoing artificial intelligence (AI) development and EV charging stations, we believe copper demand for broader network infrastructure will further accelerate in the next few years.
This will further attract thematic investors to look at copper and copper miners.
Marcus Garvey, head of commodities strategy
Macquarie Group
In the second half of 2024, investors should closely monitor copper, gold, and oil, each influenced by unique contemporary dynamics.
Copper, integral to the energy transition, is currently driven by financial flows rather than physical demand, a phenomenon I describe as 'the tail wagging the dog'.
This disconnect could lead to significant market volatility, especially with increased corporate focus, such as BHP's bid for Anglo American which underscores its structural importance.
Gold's appeal is heightened as we approach the US election. Despite the lack of a clear historical correlation between gold prices and elections, the potential re-election of Donald Trump and his proposed economic policies, including heavy tariffs on Chinese imports, could drastically impact the market.
This makes gold an attractive option for investors seeking to hedge against possible currency devaluation amid local market challenges.
Oil, on the other hand, faces its own complexities. Current OPEC (Organization of the Petroleum Exporting Countries) policies may seem sustainable, but with demand growth slowing relative to non-OPEC supply increases, the market is delicately balanced.
Any geopolitical disruption in the Middle East or significant policy shifts by OPEC could swiftly reintroduce volatility, challenging the current stability.
These three commodities, each affected by broader economic and geopolitical factors, are poised for a dynamic and potentially turbulent performance as we move into the latter part of the year.
Alexandra Symeonidi, emerging markets debt corporate analyst
William Blair Investment Management
The commodities we are watching in the second half are copper, nickel and aluminium.
Copper demand continues to be strong in the China and ex-China markets driven by grid investments, EVs and solar panels.
Coupled with supply disruptions, a distinct and sudden tightening in the concentrate market in China has emerged, driving spot treatment charges to levels not seen since 2010.
Despite the strong copper rally this year, which to an extent is a result of bullish investor positioning, we believe copper fundamentals are improving in H2 given weak seasonal mine supply building up to a deficit.
Nickel’s supply boom from Indonesia coupled with demand risks relating to nickel substitution in EV batteries drove nickel prices lower last year.
Recent price-driven supply cuts equal to about 2% of global supply, the London Metal Exchange’s ban on new Russian nickel inventories and better demand expectations spurred new life into nickel prices.
Further supply rationing from Indonesia or China in H2 is expected to ease downside risk on nickel prices.
The surge in aluminium prices this year has been overshadowed by a greater rally in alumina prices, keeping cost support relevant for aluminium.
Constrained supply driven by European smelter closures equal to 2% of global supply and China’s hydropower challenges alongside with improving demand outside China positions aluminium as the metal with the most potential for upside in H2 and beyond in our view.
Christopher Hamilton, head of client solutions, Asia Pacific
Invesco
Due to increasing growth expectations and improving economic indicators, particularly outside of the US, we currently remain generally bullish on risk assets.
However, due to deteriorating technical factors, we remain muted on physical commodities in the near term and maintain a preference toward commodity-sensitive equity sectors such as energy and materials.
As the global macroeconomic backdrop remains strong and equity market participation continues to broaden, these sectors should benefit as their cyclical exposure is met with increasing investor risk appetite.
Regardless, it is important to consider commodities over a secular horizon, particularly energy and industrial metals, as portfolio diversifiers and potential beneficiaries of capital underinvestment and increased demand for green energy.
Previously, our clients thought about commodities as a tactical idea, but with the continued upside risks of inflation lingering and uncertainty around the impact of climate policies, we’re seeing commodities being integrated into strategic asset allocation frameworks.
Additionally, institutional investors are weighing long-term exposure to digital assets such as Bitcoin as both a way to capture benefits from emerging technology and provide additional diversification from traditional stocks and bonds.