Commodity run dwarfs oil spat as emerging markets set to win

Investors and strategists at JPMorgan Chase and Goldman Sachs say the post-pandemic economic recovery will stoke demand for raw materials across the board, buoying commodity-sensitive assets regardless of whether a crude accord is reached. Russia and Colombia are among the countries that stand to benefit in particular, according to Whitney Baker, the New York-based founder of Totem Macro, which advises funds overseeing more than $3 trillion.

"A generational opportunity exists today in many of the deepest-value emerging markets," said Baker, the former head of emerging-market research at Bridgewater Associates. "Whether you export goods or whether you export commodities, you're getting an external demand boom right now for pretty much whatever it is that you sell."

Investors are looking beyond the spat between Saudi Arabia and the United Arab Emirates and the danger that 2020's oil production free-for-all will be replayed. The global surge in demand for everything from copper to clothes as economies pick up steam amid the vaccine rollout will provide a backstop for many developing nations, they say.

Cheap valuations and hawkish central banks will support currencies with the closest ties to oil's moves should a slump in crude materialize. Front-loaded tightening cycles in Russia and Mexico make those countries' currencies especially appealing, Chris Turner, the head of currency strategy at ING Groep in London, said on Bloomberg TV.

That sentiment was echoed by Goldman strategists including Zach Pandl and Kamakshya Trivedi, who flagged value in Russia's ruble, Mexico's peso and Brazil's real, despite the past week's volatility.

While assets from Colombia, Mexico and Russia are historically among the most sensitive to swings in crude oil prices, the Colombian peso is down 11%, while the Mexican peso and Russian ruble are little changed this year, according to data compiled by Bloomberg. Brent prices have climbed almost 50% year-to-date, despite the OPEC+ spat.

Pierre-Yves Bareau, the London-based head of emerging-market debt at JPMorgan Asset Management, highlighted the lag. The demand recovery will support commodities -- currently trading near a six-year high -- providing a positive backdrop for many assets in Latin America and the Gulf, he said.

But with the delta variant of Covid-19 spreading, others are less sanguine.

"The market thinks of emerging markets as the next vaccine trade -- I don't agree with that," said Bhanu Baweja, the London-based chief strategist at UBS Group, who is bearish on commodities.

A scenario where oil drops further could boost a net importer like Turkey, where the impact of commodity prices on inflation is particularly acute. The lira has slid 14% this year, the most in the world, as the country's central bank juggles soaring prices and rate-cut demands from President Recep Tayyip Erdogan.

Should the outlook for oil darken, it could still favor Russia and Qatar over other exporters, given their valuations and sovereign fiscal resilience, said Hasnain Malik, Dubai-based head of research at Tellimer.

But for the next few months, sentiment on oil-sensitive emerging markets could be shored up by supportive factors for crude.

Jeff Currie, Goldman's global head of commodities, said it's "extremely unlikely" oil will unravel on the scale of last year's collapse. A surge in demand during the northern hemisphere's summer travel season and delays reaching an Iranian nuclear accord will keep crude around $80 per barrel in the third quarter, he said.

"The market environment we see today is probably one of the best in decades," he said on Bloomberg TV.