Supply side remains supportive structurally for commodity basket: Pinakin Parekh

“Obviously this is not 2009 where you had a trillion dollar stimulus in China on a much smaller economy base. What we are talking about is essentially minus 2 to 3% demand moving to a plus 1 to 2%. So, the delta is not going to be as massive as what we had seen back in 2009,” says Pinakin Parekh, JPMorgan.

Two years ago we were all talking about that super bull run when it came to commodities. Started to see that fizzle out in 2022. Things are once again looking up in 2023 when we talk about pricing as well as demand with China reopening. Let us just first begin our conversation by setting the context.
If you look at the commodities take a broader look across metals energy, barring coal everything is up sharply between 10% to 40% on a YTD basis. And there are essentially three factors driving this commodity rally at this point of time. The first is obviously the narrative change in China. You have gone from zero-Covid policy to full opening and the expectations are that demand will improve as mobility improves and travel restrictions are lifted. There is support also coming through for the property segment as well. So that is positive for demand for metals. The second is the weather, the very warm winter in Europe essentially laid to rest fears about a massive slowdown in Europe from looming gas shortage. The gas prices have collapsed. European activity levels are much better than what was feared. So to that extent that has removed in the near term the overhang from a recession. And the third is the investor fund flows. So what happened was that second half of last year you had a massive deleveraging commodity fund. This year YTD, JP Morgan Global Team highlights one of the highest weekly increases into commodity funds that is driving commodity prices higher.

Do you think it is too naive to say China opening up will lead to metals going up?
Obviously this is not 2009 where you had a trillion dollar stimulus in China on a much smaller economy base. What we are talking about is essentially minus 2 to 3% demand moving to a plus 1 to 2%. So, the delta is not going to be as massive as what we had seen back in 2009. Having said this there is a structural supply issue which continues to be there in many commodities. The Russia Ukraine war has effectively pushed out Russian and Ukrainian steel exports out of the global markets. There is no new aluminium capacity coming outside of China. There continues to be under investment in energy. So, as long as you have demand growth which is a trend and you have under investment in many of the commodities the bullish outlook remains as it is. Yes, you will have volatility and commodity prices will be volatile but the supply side remains supportive structurally for the commodity basket.

The metal index is at an all time high. If I look at , these stocks are at an all time high. is not at an all time. is not at an all time high. So, are we going through that phase where within metals also you will see differentiated outperformers and underperformers because historically it is always metal going up everything goes up. It is a rising tight phenomenon. Metal prices go down every metal stock goes down. That is not the story this time.
We would not comment on individual stocks. But broadly what happens is that within a sector you can have near term stock performance differences based on the near term earnings outlook, near term growth outlook. But eventually as long as the cycle is broadly positive you would have the sector behave more or less uni-directionally eventually valuation differentials do narrow within the sector but it all depends on the cycle. As long as the steel price outlook remains positive we would remain constructive on the Indian metal names.

Just to understand your outlook as well on gold. Now that we have got gold prices yet again near all time highs, prices as well soaring. Do you think historically going by what we have seen in a rising interest rate environment the kind of situation that we are seeing with respect to central banks as well adding gold to their treasury as of now that the year or the outlook ahead for gold is looking promising?
The JPMorgan Global Team which looks at gold remains constructive on gold as a commodity. The macro factors you highlighted should remain supportive for gold prices. I mean to just give you a sense the JPMorgan global forecast for commodities across oil gas, aluminum, iron ore, gold broadly higher than where the spot commodity prices are, not by a wide margin but broadly the trend we are highlighting is that we expect commodities including gold to remain well supported this year as well as next year.

What would be the investment thesis then or any outlook as to what the strategy should be when it comes to investing in gold at the current prices?
Unfortunately because there are not any gold equities in India or for that matter in Asia we really do not have an investment strategy which we can recommend for gold. So as a top down at a commodity level the JPMorgan as a house is positive on gold but there is no bottoms up investment strategy.

The underperformance of both sale and which JPMorgan says is puzzling. If you would look at SAIL also giving negative returns in the last one year. Have you managed to figure out why the underperformance or still a puzzle?
We will not be able to comment on individual stocks. What we would highlight is that generally when metals as a commodity move the rally intensifies and at this point of time it looks like the rally should intensify. Especially as we come out of the Chinese New Year activity level picks up you should have the performance gap intra sector narrow. So to that extent our view is that stocks where you have consensus on upgrades remain well positioned at this point of time.

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