Diversified commodity indices are down about 5 percent year-to-date. Equity markets are up significantly and the Japanese yen has weakened, which suggests that broader economic concerns do not seem to be driving prices. This puts the focus on supply as the main culprit. However, blaming the commodities slump on supply alone would be inaccurate. Global purchasing managers' indices disappointed expectations in April. Softness in car sales and questions over U.S. economic stimulus also weighed, while China's outlook still calls for a slowdown.
So should the market be worried? We don't think so for two reasons. First, we expect favorable developments for prices on the supply and demand side in the coming months. And second, elevated speculative positions in the futures market have made it easy for supply and demand concerns and technical factors to pressure prices lower. With the most aggressive net long positions in the futures market having moderated, the negative impact of these short-term flows on prices should diminish.
We believe that the investment cycle will broaden and strengthen in the coming months, particularly in Asia. Even in the U.S., where activity indicators in the first quarter of this year were disappointing, the investment side of gross domestic product showed a strong year-on-year acceleration. This and good European economic numbers give us confidence that global GDP growth can still gain traction and support commodity demand in the second half of this year. Demand for commodities has been strong this year with oil offtake—a form of upfront trading—running at a healthy pace, supported by Asia and Europe.
Considering our outlook for firmer economic activity amid disciplined supply, we believe the odds are in favor of higher commodity prices. Historically, the strongest return periods for commodities are during the later stages of an economic upswing. We therefore feel comfortable in our outlook for a 10 percent-plus appreciation in broadly diversified commodity indices over the next three to six months.