The natural resources inflection point

Since March 2016 three events have built a floor under commodity pricing. OPEC’s agreement to cut production was one: On 30 November, the cartel reached a firm decision to reduce output by 1.2 million barrels per day. A second key event was the election of President Trump. We expect leadership changes at the Environmental Protection Agency (EPA) and Federal Energy Regulatory Commission (FERC) to support energy and power market development.

Just as significant was the publication in March 2016 of China’s National Development and Reform Commission’s (NDRC) thirteenth five-year plan.

The plan initially targeted coal; illegal mines were forced to close, and the NDRC restricted the number of days that legal coal mines could operate from 330 days per year to 276 days. With Chinese capacity effectively cut from 5.0 billion tons to 3.2 million tons, a price response began globally given the country’s 50% share of global annual consumption. Prices have climbed 85% higher for thermal coal and 290% higher for metallurgical coal through December 2016.

Taken together this triumvirate of developments has helped catalyse an inflection in commodity prices that in our view will likely continue for years to come.

Robin Webhé – The Boston Company, a BNY Mellon company

Since March 2016 three events have built a floor under commodity pricing. OPEC’s agreement to cut production was one: On 30 November, the cartel reached a firm decision to reduce output by 1.2 million barrels per day. A second key event was the election of President Trump. We expect leadership changes at the Environmental Protection Agency (EPA) and Federal Energy … read more

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Commodities form a link in the virtuous circle for emerging markets

While the fortunes of emerging markets are not solely tied to the outlook for commodities, the recent bounce offers yet another reason to be optimistic.

The rally in commodity prices over the past six months has been fairly broad based and this will have an obvious benefit to commodity- exporting countries as, all things being equal, one would expect higher nominal exports to translate into stronger economic growth for export-dependent economies.

Rising commodity prices can help improve these countries’ balance of payments position and, in turn, reduce current account deficits. Currencies of commodity exporters are also likely to be well supported, something which could potentially raise the appeal of local currency strategies.

Since the end of last year, key exporters. such as Russia and Brazil, have demonstrated a strong pick-up in economic growth. But other major importers, such as China, are also faring well, highlighting the positive effect of other key themes at play in the emerging world.

Global data across both the developed and emerging world continue to improve—marking the first co-ordinated cyclical upswing for many years. The cyclical growth backdrop remains supportive for emerging market assets and current conditions have historically been associated with increased capital flows in to emerging economies. In combination, these factors could override the dampening effects of political and fiscal uncertainty stemming from the developed world.

Rodica Glavan – Insight, a BNY Mellon company

While the fortunes of emerging markets are not solely tied to the outlook for commodities, the recent bounce offers yet another reason to be optimistic. The rally in commodity prices over the past six months has been fairly broad based and this will have an obvious benefit to commodity- exporting countries as, all things being equal, one would expect higher … read more

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What lies beneath: The hidden truth of EM commodities

Emerging market (EM) countries have borne the brunt of the recent commodity price collapse: the Institute of International Finance estimates global investors pulled US$735bn out of emerging market bonds and equities in 2015, the worst capital flight in 15 years.[1]

But we believe the popular view of emerging markets as predominantly commodity-dependent net exporters – is a mistaken one. For some EM countries, energy is a key export; while for others (Latin America, for example) exports are predominantly soft commodities and metals. In Asia, with one or two exceptions, countries are mainly net importers, particularly of energy. Across emerging markets, just 44% of countries are net exporters, while 56% are net importers.[2]

We think these nuances matter. They demonstrate the importance of viewing emerging markets not as one monolithic whole but rather as a broadly differentiated set of investment opportunities and challenges.

Rodica Glavan – Insight, a BNY Mellon company

[1] Bloomberg: ‘Emerging Markets Lost $735 Billion in 2015, More to Go, IIF Says’, 20 January 2016

[2] JP Morgan: ‘EM exposure and vulnerability to commodities revisited’, 9 March 2016

Emerging market (EM) countries have borne the brunt of the recent commodity price collapse: the Institute of International Finance estimates global investors pulled US$735bn out of emerging market bonds and equities in 2015, the worst capital flight in 15 years.[1] But we believe the popular view of emerging markets as predominantly commodity-dependent net exporters – is a mistaken one. For … read more

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2016: Key market drivers for the year ahead

For the world’s markets, 2016 looks set to be another challenging and volatile year. In politics, the US election promises to be a headline event but other countries’ voters will also be heading to the polls. In Europe, for example, a potential EU referendum in the UK and the rise of extremist parties could have profound implications for the future of the world’s largest economic block.

On the macro-economic front, world GDP growth looks likely to continue to be driven by diverging and idiosyncratic stories over the medium term.

In the US, key questions will be whether the economy can detach from external affairs – and whether increased consumer spending can translate into significant interest rate rises. Additionally, the strength of the dollar will be an important factor to consider. In Europe, the Central Bank’s policy intentions will remain front and centre, while in emerging markets, a further slowdown in China could have a tremendous impact on resource-based economies across the world. In Latin America, meanwhile, select economies are seeing some nascent signs of stabilisation even as inflation remains worryingly high.

Finally, the commodities story can be expected to remain a crucial factor governing global growth prospects in 2016, with the supply and demand dynamic for basic materials driving fundamentals across broad swathes of the currency, equity and fixed income markets. Will commodity producers have enough currency reserves and the right policy toolkit to survive ‘lower for longer’ commodity prices? And will commodity-consuming countries see a more sustained pick-up in confidence?

These questions, among others, will form a large part of our analysis over the coming year. Click here to access more outlook pieces for 2016.

Jason Lejonvarn – Mellon Capital, A BNY Mellon company

For the world’s markets, 2016 looks set to be another challenging and volatile year. In politics, the US election promises to be a headline event but other countries’ voters will also be heading to the polls. In Europe, for example, a potential EU referendum in the UK and the rise of extremist parties could have profound implications for the future … read more

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How will commodity prices sway developed market growth in 2016?

More than a year on from the collapse in commodity prices we can see how quickly the global growth prospects of energy exporting countries – in this Australia and Canada – have been affected. We’re not witnessing any restriction in oil and gas supply or any sustained pick-up in demand or pricing – and, given the US’s newfound status as a global non-OPEC producer, nor do we expect to see any concerted action on tackling chronic levels of oversupply. Typically with commodities you see significant overinvestment followed by swift declines in pricing due to overcapacity. It’s a cycle that can last several years to play out and we’re really only at the start.

The reality for 2016 is likely to be a divergent world with different rates of growth and hence a variety of approaches to interest-rate policy. We believe developed economies will continue to expand into 2016 although at different and, on average, moderate rates. It is certainly unlikely to be an environment in which growth picks up to a point where major central banks across the globe will drastically withdraw from their accommodative monetary policy regimes.

Vassilis Dagioglu – Mellon Capital, a BNY Mellon company

More than a year on from the collapse in commodity prices we can see how quickly the global growth prospects of energy exporting countries – in this Australia and Canada – have been affected. We’re not witnessing any restriction in oil and gas supply or any sustained pick-up in demand or pricing – and, given the US’s newfound status as … read more

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