Citigroup bullish on commodities as spending cuts curb supplies

[SHANGHAI] Commodities are poised to strengthen in the second half and through next year, pulling in more investors, as spending cuts restrain supply and demand continues to grow at a moderate pace, according to Citigroup Inc.

Markets for raw materials "continue to lurch toward rebalancing" and a strong performance will support new investment inflows, both into physically backed exchange-traded funds and passive long-only vehicles, analysts led by Ed Morse said in an e-mailed note received Monday.

Global demand continues to expand, helped by growth in the US and Chinese economies, while supply cuts are now showing in petroleum and North American natural gas, in an array of base metals, in platinum group metals and in some farm products, it said. The bank is "especially bullish" for next year as inventory reductions become more pronounced.

"Unlike last year, when commodity markets rallied through 2Q only to fall sharply come 3Q as oversupply persisted, this rally looks more sustainable as physical markets have tightened considerably," Citigroup said.

The Bloomberg Commodities Index, measuring returns on 22 raw materials, climbed 13 per cent in the first half after falling to the lowest in 25 years in January.

Any pain for commodities from the UK's vote to leave the European Union should be relatively short-lived, the bank said. Strong investor flows into raw materials will resume later in the second half of this year as fears over Brexit subside and commodity price volatility eases. Citigroup is bullish on gold, soybeans and sugar.

BLOOMBERG