The commodities complex is coming off a second quarter in which it was one of the worst-performing alternative asset classes. Good news for investors seeking alts exposure: they are reversing for the better since the start of the third quarter.
That could be a prelude to better things throughout the second half of the year. The widely observed S&P GSCI, a broad gauge of commodities, posted a double-digit gain in July with significant contributions from several energy commodities.
“The energy sector completely reversed its underperformance from the first half of the year, bringing all commodities into positive territory for 2023,” according to S&P Dow Jones Indices. “OPEC+ production cuts and the absence of negative economic data helped to lift the fossil-fuel-based commodities in July.”
While renewable energy sources are incrementally grabbing larger slices of the global energy pie, investors don’t need to fret right now because data confirm global oil demand remains sturdy.
Industrial, Precious Metals Showing Signs of Life, Too
Speaking of the renewable energy transition, that’s a commodities-intensive endeavor as products such as electric vehicles, solar panels, wind turbines, and more require commodities – namely industrial metals. The S&P GSCI Industrial Metals notched a July gain of 6.5%.
“For the past few months, Commodity Trading Advisors (CTAs) had large short positions in the space, but short covering in July led to a strong bounce off the lows for several key metals, which have posted some of the worst YTD performance rates in the commodities markets,” added S&P Dow Jones.
Both gold and silver added to year-to-date gains last month, but on the precious metals front, there’s work to be done because both palladium and platinum are saddled with hefty 2023 losses. While those two metals usually aren’t large parts of broad commodities benchmarks, rebounds by either or both could signal a resurgence of risk appetite in the commodities space.
Led by corn, agriculture commodities performed admirably last month, though there is concern that space could face challenges by way of China’s declining population.
“China is the biggest consumer of grains globally, but the World Bank recently forecasted that after decades of strong growth, their population will fall by 80 million people over the next 25 years. Could this lead to less demand, or will new areas of demand, such as in more environmentally friendly biofuels, spur new global consumption to supplant the drop in the food needs of China over time,” concluded S&P.
The good news is that other large economies, including India, are experiencing population growth and that could be a structural positive for a variety of commodities.
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