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Silver and Nickel in Focus as Investors Turn More Positive on Global Growth
ETF Securities – Silver and Nickel in Focus as Investors Turn More Positive on Global Growth. Over the past week investors have turned more positive in the outlook for the global economy and for a peaceful resolution to the Ukrainian crisis, with more industrially-sensitive commodities like silver and nickel seeing strong inflows and gold seeing outflows. Although US bond yields have been declining recently, possibly partly due to weaker than expected growth data from the US in the first part of the year, most forward looking indicators point to US recovery in 2Q 2014 and into the second half of the year. Stronger US growth, together with indications China’s stimulus policies are starting to have a positive effect on China growth (PMIs hit 5 year highs in May), increase our confidence that global recovery remains on track, supporting our positive view on broad commodity performance, with the industrial metals, platinum and palladium our top picks.
ETFS Daily Leveraged Silver (LSIL) receives US$9mn of inflows as investors rotate out of gold into silver. Silver inventories have been trending down this year as industrial demand has picked up. Due to its larger industrial demand base, silver tends to be more correlated with the business cycle. Supply and demand indicators are turning price positive in our view. Increasing demand from China, increasing investor demand and strong fabrication demand are being met with falling supply and dwindling inventories.
Gold ETPs see the biggest outflows since March as investors focus on more cyclical commodities. A stronger dollar, coupled with fears of a slowdown in physical demand from China, weighed on the gold price last week driving US$52mn of outflows from gold ETPs. While Chinese net gold imports are up 18% so far this year compared to 2013, recent data shows China imported the least gold since February 2013 in April, feeding fears of dwindling physical buying. In our view this is not the beginning of a new trend and we expect continued robust China gold buying in the coming weeks months.
ETFS Nickel (NICK) see $17mn of inflows following price correction. Despite the recent correction in prices, nickel remains the best performing industrial metal this year with a 37% ytd price rise. While we believe that nickel may have near-term upside on momentum buying, stretched positioning and elevated inventories could cap further price rises. At the same time, long copper ETPs saw US$8.1mn of outflows last week on concerns over the US economy after Q1 GDP was revised downward from +0.1% to -1.0%. Given positioning and sentiment, we view copper as a less risky way to play the rebound in global growth.
Platinum and palladium ETPs see US$14.1mn of outflows as talks between miners and unions resume. An inter-governmental technical team composed of representatives from the government, the three biggest miners and the AMCU is working on a possible resolution to the 19-week long South African strikes. Supply of both metals has become a lot tighter in recent months, impairing producers’ ability to meet their contractual obligations. We believe platinum and palladium could rally sharply should mining companies fail to meet all contractual obligations or announce active metal buying on the open market.
ETFS Daily Leveraged Wheat (LWEA) records US$4.1mn of inflows on lower expected global wheat crop in 2014. The International Grains Council lowered its estimate for this year’s global wheat production last week, claiming that bad weather has adversely affected crop conditions. However, the wheat price dropped by a further 4.1% last week, as investors became more optimistic on a peaceful resolution to the Ukrainian crisis. Ukraine and Russia account for 16% of global wheat exports.
Key events to watch this week
This week the focus will be on the ECB rate decision with a cut in rates increasingly likely this month. US Non-farm payrolls will also be monitored to assess the strength of the US economy and the pace of tapering by the Fed.
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).
From 18 to 19 November 2024, Brazil will host the G20 summit in Rio for the first time as the focus of the world’s most important platform for global economic cooperation.
The coalition, which includes the USA, China, India, the E U and, most recently, the African Union, represents the world’s most important economies, which, according to OECD figures, account for around 80 per cent of global gross domestic product, 75 per cent of world trade and two thirds of the world’s population.
Since Brazilian President Luiz Inácio Lula da Silva (Lula) took up his third uninterrupted term of office at the beginning of 2023, he has spent a lot of time abroad to improve his country’s image in the world. His efforts could pay off. A recent Pew Research survey found that most Brazilian adults are optimistic about their country’s status as an international power.
In addition to the G20, Brazil is also set to host other high-profile events such as the UN Climate Change Conference (COP30) and the BRICS summit (Brazil, Russia, India, China and South Africa) in 2025, while also seeking membership of the Organisation for Economic Co-operation and Development (OECD).
In the almost three years since Brazil initiated its formal accession process for OECD membership, the country has achieved many milestones on the road to this goal. If successful, Brazil would be in a unique position to influence the increasing geopolitical and economic competition between industrialised and developing countries, as it is the only country to be represented in the BRICS, the G20 and the OECD simultaneously.
As the eighth largest economy in the world and the largest economy in Latin America, Brazil could be a strong link in the global discourse on key issues for the Global South (according to UN Trade and Development, the Global South essentially comprises Africa, Latin America and the Caribbean, Asia excluding Israel, Japan and South Korea, and Oceania excluding Australia and New Zealand).
These issues include, above all, the fight against hunger, poverty and inequality, sustainable development and the reform of global governance. If Brazil is able to achieve political and financial commitments to progress on priorities such as digital infrastructure, this could lead not only to an increase in Brazil’s GDP, but also to a narrowing of the economic and urban-rural divide and a reduction in gender inequality. Consider that the introduction of a relatively new instant money transfer platform operated by the central bank, known as Pix, has already promoted financial inclusion and increased access to banking services from around 70 per cent of the population to more than 84 per cent (source: Carnegie Endowment for International Peace).
We expect that an OECD seal of approval for Brazil will also encourage global investors seeking the assurance of the Coalition’s high standards for the ease of doing business. A seat at the table would give Brazil a stronger voice in shaping best practices and global frameworks for rapidly evolving technology standards. Brazilian companies specialising in artificial intelligence and financial technology are already among the largest in South America.
As the largest oil producer in Latin America, resource-rich Brazil is a leader in the energy sector, as it is one of the ten largest oil producers in the world (according to the U.S. Energy Information Administration, Brazil produced 4 per cent of the world’s total oil production at the end of 2023). However, the country’s largest sector is finance, with a weighting of more than 36 per cent according to the MSCI Brazil Index.
Central bank in interest rate hike mode
High government spending continues to be a major problem. In our opinion, any reduction in this spending would give the country’s capital markets cause for optimism. Meanwhile, Brazil is an exception to the global trend of falling interest rates: In September, Brazil’s central bank raised interest rates to curb inflationary pressures. The market expects the Brazilian real to remain stable or appreciate slightly in the near future, partly due to falling US interest rates. We see this as a potential advantage for foreign investors in Brazil.
It is also encouraging to see that progress is being made on Brazil’s long-awaited VAT reform, which could further boost the private sector as efficiency gains from a simpler tax system would favour investment.
Growth in Brazil’s manufacturing and services sectors accelerated in September as output in both sectors increased, indicating strong growth in economic activity. In addition, the Brazilian market is currently trading at valuations that we consider favourable. Improved conditions in Brazil’s manufacturing sector have been driven by a resurgence in production, stronger job creation and a pick-up in sales growth, according to S&P Global. At the end of September, Brazil’s Manufacturing Purchasing Managers’ Index was surpassed only by India, rising to 53.2 (from 50.4 in August; readings above 50 indicate expansion).
Chart 1: Brazilian Purchasing Managers’ Index
Source: FactSet, Markit Economics
Expectations are also high that Brazil will experience an economic boost in 2027, having won the historic bid to host the FIFA Women’s World Cup – a first not only for Brazil, but for the whole of South America.
Over the near term, we believe investors should stay attuned to the opportunities in Brazil and may find what we consider an attractive entry point into this large and diverse market.
Chart 2: The valuations of Latin American equities look favourable
Attractive valuations compared to industrialised countries, emerging markets and own history
Chart 3: Latin American equities offer high dividends
High dividend yield compared to industrialised countries, emerging markets and own history
From Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton
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