• China’s slower growth = slower demand
• Unlikely to see any catalysts
• Maintain UNDERWEIGHT
Annus horribilus yet again
The commodities sector just could not catch a break, with energy prices leading the rout with a fall of nearly 60% since the start of 2015. And with the sharp slowdown in China’s industrial production and infrastructure expansion, industrial metals were also very badly hit. On average, the commodities stocks under coverage crashed over 26% YTD to 4 Dec, versus the STI’s 15.3% decline.
China – slowing growth, slowing demand
In our previous strategy report, we highlighted that China could see more muted demand for commodities, especially for energy and hard metals; this as industrial production continues to plummet along with the slowdown of the economy. And with economic growth expected to remain around the sub-6% levels in the next two years, the prospects for a meaningful pick up in commodity prices have all but been pushed back to at least 2018.
Still no light at the end of the long tunnel
And it is not just China – the slowing economic malady is spreading around the globe, hitting first the commodities exporting countries, China’s trading partners and even the developed economies. And given this sluggish demand outlook, coupled with ample supply, the latest World Bank’s Oct 2015 Commodity Markets Outlook report believes that the current El Nino episode, while likely to be one of the strongest in history, is unlikely to cause a spike in global agricultural prices.
Keep UNDERWEIGHT again
Given the persistently muted outlook for the overall commodity sector, especially for crude oil, we continue to be UNDERWEIGHT the sector, as positive catalysts are likely to remain few and far between in the near to medium term. (Read Report)