Pre-election jitters are keeping some investors away from the resources sector of the Australian stock market, but in the US, exactly the opposite appears to be happening as mining and oil companies reclaim lost ground.

One reason for the return of commodities as a popular investment class is that everything else in the US has become too expensive, especially over-promoted technology stocks.

Another reason is that fear of a full-blown trade war, despite the latest threat of higher tariffs from President Donald Trump, is fading after last year’s big sell-off which decimated mining and oil shares.

Citi, a New York-based investment bank, summed up the changing view with a snappy headline on a report which recommended resource stocks as a growth sector. “Springtime for Commodities” arrived with the theme of it’s time to “re-engage with the original asset class”.

While it lacks stock-specific recommendations, the Citi research is a useful starting point for resource-stock investors for the way it identifies likely winners and losers in the commodity world over the next 12 months.

Time for all folk?

A second benefit of the research work by Citi’s US analysts, and back-up comments from an Australian team, is that trends which develop over there have a habit of turning up here, sooner or later.

The key date for Australian investors interested in what Citi has to say is May 18, the day when a change of government in Canberra seems likely and it becomes easier to separate the campaign rhetoric and empty promises from the reality of governing.

Until then it’s probably a case of watch and wait, while also finding the time to absorb the factors which have re-awakened interest in commodities at one of the world’s biggest banks, including a comment which has an amusing Australian touch: “It’s time”.

Citi did not precisely use the two-word slogan made famous by Gough Whitlam when he led Labor to victory in the 1972 federal election, but it came awfully close – “the time is ripe to find new ways to invest in commodities as an asset class”.

“While 2018 was a difficult year for commodities, 2019 is looking to be structurally more constructive and it is now a fortuitous time to adopt a commodities portfolio and its strong returns in 2019,” Citi said.

High on the bank’s “conviction” list is oil as events in Iran and Venezuela tighten the near-term market. Iron ore is likely to continue enjoying strong prices, but only for another one-to-three months. Coal is poised to fall.

It’s in the metal part of the commodity world that Citi’s views are particularly interesting for Australian investors with copper expected to rise towards $US3.18 a pound) over the next three months, with zinc likely to be the sick man of the metal world.

Citi has been a copper bull for some time, correctly predicting the rally which lifted copper from around $US2.60/lb late last year to almost $US3/lb in February – before the recent slide back to $US2.83/lb.

“The next leg up in prices is set to be driven by physical tightening and investor positioning as overall, copper remains lightly positioned given the likely improvement in China,” Citi said.

Zinc, which has enjoyed near-boom conditions over the past four years, is expected to retreat sharply as supply over-powers demand with the price tipped to contract from its current $US1.28/lb to $US1.04/lb next year.

Metal gurus

In simple terms the message for investors with an interest in base metals is buy copper stocks, sell zinc stocks.

Gold, a favorite of Australian investors, gets a positive assessment from Citi despite its recent price fall to around $US1275 an ounce.

Over the next six-to-12 months gold is expected to reach $US1400/oz, helped up by a forecast fall in the value of the US dollar against other currencies.

The importance of China’s economic recovery after last year’s slowdown is a key part of Citi’s view that commodities deserve a prominent place in all investment portfolios.

“Now that the March quarter is over, much of the fog hanging over the market has lifted,” the bank said.

“There is now significant optimism over the outcome of the US and China trade talks and the impact of Chinese fiscal and investment policies.”

The transference of economic optimism into hard-headed investment decisions is starting to be seen as funds flow back into commodity-linked funds with $US11 billion making its way into exchange-traded commodity funds in March alone.

Citi said a series of factors were lifting the commodities outlook for the June quarter, starting with momentum from the recovery from December lows into the first quarter of 2019.

Problems remain, and always will, with the unfinished business of Brexit likely to be a destabilising factor in commodity markets over the rest of 2019. Another significant area of uncertainty is the price of oil and the potential for over-production which could drive the price sharply lower.

However, in Citi’s word: “Global growth is looking better, and with-it commodity demand.”