2023 was another turbulent year for financial markets, operating in a highly uncertain environment. During last year, stocks exhibited a significant divergence in performance against a backdrop of unusually low volatility. As for commodity prices, in spite of the sharp drop from 2022, they remained at comparatively high levels during 2023. Regardless, there were still massive price differences, for example, in oil and gasoline.
The main reason for these market trends is geopolitics. Financial markets usually behave in compliance with political events and reflect different processes. Last year, the number of geopolitical risks broadened, which had an impact on financial markets. The imbalance of supply chains and prices caused disequilibrium and volatility, in particular, in commodity markets in 2023.
An alternative interpretation of these phenomena may relate to the monetary policy of the Federal Reserve. The elevation of rates by the American central banking system has also influenced the disparity in prices within commodity markets. Furthermore, such a policy has not only impacted economies but has notably shifted the entire lending paradigm. Considering this, let’s have a look at the commodity market and some of the notable 2023 spreads in detail.
Grains
One of the examples of last year’s remarkable spread was the wheat-rice price difference.
The wheat-to-rice spread was at historically attractive levels, making it a fundamentally strong opportunity. Wheat seemed to be notably undervalued when compared to a variety of grains, whereas rice shows indications of being, on the contrary, overvalued. It can be seen from the graphs how the price gap has diminished recently.
ZW to grain basket 2000 – 2023 (equally weighted grain commodities)
Coffee
Another pair can be tracked in the coffee market, particularly between Arabica and Robusta beans reaching unprecedented high prices. The spread between these two sorts of coffee beans hovered around a crucial historical support level last year. It is essential to note that the spread exhibits a gradual mean-reversion (graph below) in 2023, implying a significant probability of maintaining a market position for over a year.
The Arabica – Robusta Spread 2000 – 2023
Cocoa
The cocoa market experienced a substantial spike last year attributed to production challenges in Ivory Coast and Ghana. The remarkable surge of 60-70% in London's cocoa futures was another significant trend of 2023. This surge appears to be driven by consistent chocolate demand in Europe in spite of diminishing cocoa reserves.
According to the latest data at the beginning of 2024, the cocoa price in London was approximately $250 per ton higher than in the US market, signaling a notable departure from the trend observed in the past few years, where London prices tended to be generally lower. You can observe the tendency on the graph of the spread below.
The European and American Cocoa Spread 2012 – 2023
Beyond these spreads strategies, there are other tools designed for high diversification of client portfolios and enhancement of crucial ratios. The aim is to select a set of approaches that behave fundamentally uniquely under different market facets and build a self-stabilizing portfolio that excels in a crisis and behaves even better than in times of stability.Forecasts for 2024.
Forecasts for 2024
We see that the world is in a situation of great instability, and I predict a decline, first of all, of geopolitical factors, which will affect the economy and lead to exacerbating existing imbalances.
Currently, we are amidst a period of elevated inflation and, consequently, heightened risks. We advocate for diversification employing both high-risk, high-profit instruments on one hand and low-risk, high-yield options on the other. Nevertheless, the last one can be considered as a reflection of stagnation.
In essence, the conventional wisdom in financial literacy spanning the past five decades seems to be obsolete. In 2024, the worst mistake would be constructing a traditional portfolio comprising corporate bonds and stocks. We are living in a BANI-world (Brittle, Anxious, Non-Linear, and Incomprehensible), thus choosing to follow the strategy of rapid yet thorough actions amidst world events.
Moreover, the trend initiated in 2022, where customers place significant importance on the trading platform and associated commissions, persists. The choice of brokers, whether they are large or niche, has also gained prominence. Infrastructure solutions now play a crucial role for customers, who are no longer attracted solely by profitability. Other factors, such as the company's developmental trajectory, the range of infrastructure solutions offered, and the assessment of non-market risks, have become pivotal. From my perspective, these factors are likely to continue as trends in 2024.