A new bull market for commodities has begun. It’s not me saying that, but Geoff Blanning, head of commodities at Schroders. He reckons the natural resources bear market is over, following five years of “devastatingly poor returns” and the bulls are set to roar.

Blanning also points out that the biggest price gains, in percentage terms, occur at the beginning of a bull market, as expectation turns from bearish to bullish, and this makes now the time to focus on this “unloved asset class”. 

Digging deeper

Foolish investors who keep an eye on these things may think that Blanning is behind the curve. Especially those who have been following the fortunes of FTSE 100 listed mining giants Anglo American (LSE: AAL) and Glencore (LSE: GLEN). On 20 January, which now looks like the nadir for oil and commodity stocks, Anglo-American’s share price fell to just 248p, barely a quarter of its value one year earlier. Today, it trades at 668p, having increased an incredible 270% in four-and-a-half months.

It is the same story at Glencore. At its January nadir, the stock traded at just 71p, again, having lost three quarters of its value in a year. Since then, it has doubled to 142p. These figures justify Blanning’s argument that biggest percentage price gains occur at the beginning of a bull market, as expectation terms from bearish to bullish. Unfortunately, that point has passed. So has the bull market got further to run?

Reasons to be cheerful

There are good reasons why commodity stocks could climb higher and retrieve even more of last year’s losses. Blanning lists rising demand from India (offsetting slowing China), the weaker dollar (which should make commodities cheaper to non-dollar buyers, boosting demand), and falling commodity production (lower supply should equal higher prices).

The big question is whether this is just a temporary swing. There are reasons to think that it may be: commodities were oversold in the months before January’s rout, and much of the recent rebound was driven by investors who knew a bargain when they saw one. Anglo American and Glencore no longer look like the bargains they were, trading on forward p/e ratios of 21.9 and 39.1 times earnings respectively.

Value judgements

On the other hand, both are forecast to see explosive earnings per share growth of 43% in 2017, which may justifies these apparently pricey valuations. Their price-to-book ratios of 0.7 and 0.6 are also far from demanding, suggesting they may be undervalued.

Friday’s US payrolls disappointment may also help, as it could sink prospects of a June interest rate hike, and possibly even propel it into 2017. A weaker dollar could drive commodity prices and stocks higher, reversing the impact of the dollar bull market in the years to 2015.

Life goes in cycles

Both Anglo American and Glencore have worked hard to strip out costs to help them survive a period of lower commodity prices, shedding jobs, disposing of non-core assets, cutting back on capex, slashing operating costs and paying down debt. If the price of copper, iron ore and other commodities do rise, both companies could find themselves flush with cash just as their costs and debts are falling.

The bull market may have further to run, but be warned, you have missed out on the biggest gains.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.