AGRICULTURALS
Grain prices have performed well this year, especially rice and wheat, amid weather issues in Europe and the US.
BMI Research says it expects grain prices to head higher in the coming quarters. This is because it would not take much improvement in underlying supply and demand fundamentals to spark a substantial upside in prices, given that most speculative traders are placing significantly bearish bets on the commodity class.
"In fact, a spike in wheat prices at the start of July suggests that such a move may be starting to take place," it says.
Coffee is likely to climb slightly higher from now until 2021, with average prices to come in at US$1.35 per pound this year as the global market recovers from a supply deficit, while cocoa prices could strengthen from the fourth quarter and gradually trend higher as the market maintains balance in supply and demand.
Commodities or stocks?
Notably, both gold and the broader commodities market have racked up a lacklustre performance so far this year in comparison with global equities.
"US equities and the MSCI World Index performed very well in the first half of 2017 in spite of deteriorating fundamentals in the US economy and expensive US valuations," Mr John Davies, global commodities strategist at BMI Research, notes. The MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets.
"Meanwhile, global commodity indices are slightly down year to date, mainly because they are heavily weighted towards energy prices."
The Bloomberg Commodity Index, which tracks 22 commodity futures contracts, has lost 4.23 per cent this year, even though it has climbed steadily from the lows seen in early 2016.
Mr Wayne Gordon, executive director for commodities and forex at UBS Wealth Management, says that broadly diversified commodity indices have much higher volatility compared with bonds, and struggle to meet the return performance of equities in the long run.
Gold, on the other hand, is known to have added long-term value to investors' portfolios via less overall volatility and better risk-adjusted returns, he notes.
"A sideways move in gold prices during non-crisis times makes gold an interesting insurance asset, as it comes with low opportunity costs. If equities correct (although this is not our base case), the price of gold would be north of US$1,300 per ounce," adds Mr Gordon.
Is now a good time for commodities?
The short answer from UBS' Mr Gordon is yes, as "the global economic growth stays above trend, (and) we see greater supply discipline and the US dollar staying weak".
"Moreover, in late stages of an economic cycle, commodities tend to perform particularly well," he adds.
BMI Research's Mr Davies believes commodities will eventually outperform equities in the coming quarters, although this is likely to be "more a case of equities correcting than of commodities rallying significantly from current levels".
"We remain cautious on the performance for US equities, in particular, as valuations are getting increasingly stretched. Meanwhile, we believe that global stocks are in the final innings of their bull market," he says.
"Our bullish view on oil prices in the second half of 2017 would help the performance of commodities relative to that of equities. As we expect gold to be a relatively strong performer, gold should also gradually begin outperforming equities."
For those wanting in on commodities, the cheap valuations would now be a draw.
DBS Chief Investment Office says the global oversupply in commodities has yet to fully unwind, and sentiment remains bearish. Yet, from a longer-term perspective, this is probably a good time to take a small position in commodities.
"Global economic growth is strengthening, albeit modestly. And supply is being worked down, albeit slowly. So there are cycles," it notes.
"And commodities - particularly industrial metals and crude oil - are probably close to the bottom of their respective cycles."