Remember the commodity supercycle? While the world was getting high on incredibly loose credit between 2000 and 2009, commodity prices went absolutely bonkers. Thanks to a weakening dollar and aggressive Chinese demand, anything tangibly linked to digging things out of the ground seemed to go up, including the currencies of certain commodity-linked emerging market nations. One stat from that era for you: global M&A activity in mining and metals rose from around $10bn in 2002 to just over $150bn in 2007.
The past decade, however, has been a different story. Shale, a strong dollar, trade wars and falling Chinese consumption have — among other things — led prices to dip. Yet after the energy fallout from the Covid crisis — expressed most memorably in negative oil prices last April — are we due another cycle?
JPMorgan’s Marko Kolanovic seems to think so. In a note published Monday he outlined the reasons why energy prices, and related assets, might have turned.
The note is in the usual place, but we wanted to pick out one factor that Kolanovic and his team thought might contribute. Here’s the relevant paragraph:
And here’s Figure 4:
Convincing stuff. Although a counterargument here might be the fact that retail investors seem to have little interest in anything with a perceived negative effect on society — whether it be tobacco, defence or energy — at the moment. Conversely, ESG stocks keep going up. Not because the valuations are favourable, but just because they don’t want to own names like Shell, Altria or Lockheed Martin and express this through exclusionary ETFs, index funds and investment trusts. Will they abandon their principles to chase returns? Who knows. But, having talked to several young investors looking to make their first investments, it wouldn’t be the base case for us.
Thoughts welcome below, as always.