What is the attraction of exposure to commodities within investors’ portfolios in today’s macro and market environment?
One can identify three key reasons for investing in commodities today:
- De-globalisation of supply chains in a post-COVID world as countries seek to onshore strategic industries after the supply chain collapse seen during the pandemic. This means higher and less efficient consumption of commodities as new infrastructure needs to be built.
- The generalisation of ESG which calls for the repricing of externalities in the economy. As we move price carbon, Energy is set to become more costly, impacting the pricing of all commodities.
- Geopolitical risks which have risen in an international landscape where the US has progressively disengaged over the last decade, creating the power vacuum which are behind the crises we are faced with today.
All these factors are translating into inflation risks that can only be hedged by investors using commodities.
What are the expected returns and what are the biggest risks to consider?
We expect that commodities can provide reasonable returns of 5 to 10% per annum over a medium term horizon. This is likely to be achieved while providing inflation and geopolitical risk hedging, as well as decorrelation properties to a portfolio of financial assets. Technological change and a sharp increase in the cost of carry, as experienced during the early months of the COVID-19 pandemic in 2020, are key risk factors for commodities.
How should investors adjust allocations to different commodities in response to the geopolitical pressures they face?
As geopolitical risks increase, so do idiosyncratic supply risks for key commodities such as Energy, Base Metals and Agricultural products. The current crisis involving Ukraine and Russia has had profound impacts of many commodity markets, from Energy markets such as Crude Oil, Distillates and Natural Gas, to Base Metals with Aluminium and Nickel, and Grains markets such as Corn and, even more importantly, Wheat where Russia and Ukraine collectively represent more than 25% of the World’s export market. This demonstrates that allocating to Gold is not enough and that a broad based approach, allocating to a diversified basket of commodities such as the ones included in the BCOM index, is a more efficient way for investors to hedge against commodity price driven inflation. It is the approach taken in our portfolio.
The Fund Selector Asia Investment Forum Thailand was held virtually on 24 March 2022 and was sponsored by Columbia Threadneedle Investments, Matthews Asia, TT International and Pimco.
Find out more about what was discussed and the strategies that were presented here: https://fundselectorasia.com/events/fsa-investment-thailand/