Analysis: 2021 Could See Commodity Boom, but Political Risk in Brazil Remains Threat

RIO DE JANEIRO, BRAZIL – Last year was a nightmare for some, but there is an expected turnaround for commodities in the global scenario for 2021. This is what analysts claim, who are betting their chips on the resumption of prices against the higher demand and lower supply scenario.

A survey by Crescat Capital pointed out that the relationship between commodities and the global stock market is at its lowest level since the 1970s – and, according to manager Otávio Costa, the beginning of an upward trajectory is looming.

“There are opportunities in the commodities area. We thought that the beginning of this trend would occur mainly in precious metals and mining companies. We recently witnessed commodities beginning to break a 12-year resistance,” he said.

Crescat’s manager said it will be a “turning point” for the market. “It will greatly change things, particularly stocks with absurd valuation such as the technology sector, for instance. Commodities are still the next in line this year. A trend that began at the end of last year.”

In 2020, the coronavirus pandemic cut the production of precious metals faced with the drop in global demand. As a result, there was a reduction in stocks and a subsequent price rise, which according to analysts should be sustained in the coming years since demand will quickly pick up as people are immunized against Covid-19 and the rate of production increase is slower than that.

The price of gold traded at Brazil’s B3 exchange climbed by around 56% in 2020, while silver rose by some 45% over the same period. The barrel of Brent oil, traded in London, dropped by 24%, while WTI oil, quoted in New York, dropped by around 21% in the period.

The oil futures contracts reached negative prices in the United States throughout the year – as producers were practically paying to prevent having to stock more commodities. It is worthy of note that global demand for oil plummeted at the peak of the pandemic in mid-March and April 2020, as measures to restrict the circulation of people were implemented worldwide, causing flight cancellations and border closures.

“Oil can be one of the best assets of the year in investments,” said Costa. “What we saw in 1919 after the Spanish Flu was also a problem in which commodities became virtually a rarity. There was an inflationary force due to the increase in commodity prices,” he added.

“The Democratic leadership in the United States should further support the commodities market. (…) Demand for commodities will bounce back with the tight supply. This will cause an explosion in prices, mainly precious metals and oil. We have already seen gold climbing, silver climbing as well, but we haven’t seen oil rising yet. It will happen,” he concluded.

Luiz Eduardo Portella, partner of Novus Capital, believes that the world may enter a cycle of rising commodities and emerging markets, as we witnessed between 2001 and 2009. “Over the past ten years, we only had American stock markets outperforming and the emerging markets skidded in the period. We now see an inversion of this trend for the coming years,” he said.

“This Covid crisis caused the excess capacity in some markets to drop to zero. Everyone will need to re-stock, to start a strong industrial production cycle worldwide that will still last a long time. With the introduction of the vaccine, the service sector, which greatly pushed activity down, will be back on its feet,” he assessed.

However, Portella reflected on the political risk. He mentioned the voting for Chamber president and that both candidates are reformists. “Until the next elections in 2022, we are reassured by the cap. By making reforms, we can ride this positive global wave. We can close the year 2021 with the IBOVESPA over 140,000 points,” he concluded.

According to Felipe Taylor, MAG Investimentos stock manager, in 2021 there will be a significant leadership shift in the sectors that drove economies, as the global population is immunized and life returns “to normal”, thereby making room for profit growth of companies that are more exposed to economic rebound.

“In 2020, businesses that managed to do well despite the crisis were the ones that grew, such as the technology sector, which benefited from more people staying home and working from home. Technology and Internet companies, which were the highlight in 2020, do not have valuations that create discomfort, they should continue to perform well, but should not be highlighted again in 2021,” he said.

“This role should fall to commodity companies in general, the oil sector, an industry that suffered greatly last year, and everything related to tourism, such as airlines. They will deliver significant profit growth over the next two years, particularly because the basis of comparison was low,” he added.

So far in 2021, the Brent oil barrel has already climbed 10.5% in London, while the WTI barrel registers a 10.3% rise in New York.