Are commodities worth a punt? – Birmingham Post article 13.05.2021

Trying to predict the next “hot” sector – whether that be gold last year, environmental, social and governance (ESG) stocks, or cryptocurrencies – has never been the Eastcote Wealth Management way of investing client monies.

Our message is that diversification in a balanced portfolio over the medium to long term should always apply.

Having said that, an exposure to commodity funds may well be not a bad call in 2021 for those who “do it themselves” or leave this decision to their fund managers within a multi asset/multi-manager approach.

As with anything, it is not just the decision of what and when to go in, it’s when to come out which contributes more to making the most profit.

Some pundits favour commodities; others are more sceptical.

I’ve picked out two examples – Jon Deane, a former head of commodities trading in the Asia Pacific region for JP Morgan, now CEO of InfiniGold, is bullish whereas Allianz Global Investors (AGI) are more bearish.

The former is hopeful of a commodities “supercycle” arriving, while the latter points out that higher commodity prices could harm any global economic recovery we may be witnessing.

What is a commodities “supercycle”? It is where a range of base material prices continues to hover well above their long-standing monetary trend lines for extended periods, even decades. The reconstruction of Europe and Japan in the 1950s was one example and the rise of the BRIC nations – Brazil, Russia, India and China – another.

In an article for the Nasdaq exchange, Mr Deane states: “A number of studies suggest that the metal and agriculture sectors are all set to rope in respectable gains over the course of 2021. This could be due to fears of inflation becoming increasingly prominent, primarily because of factors like falling interest rates and the continuing issuance of fiscal stimulus packages by governments.

“Oil has seen some speculative interest. The debate is now how quickly prices will recover, with Goldman Sachs forecasting $65 oil by the summer, and how high other commodities may soar. With the introduction of vaccines, global travel will return, which will, in turn, increase the demand in these commodities.

“Covid-19 has led to a renewed push for a greener future, a trend that is constructive for several metals including iron ore, copper, zinc and aluminium as well as silver. All are driven by industrial demand. Further, with many powerhouse nations like China and India investing massive sums of money on global infrastructure projects, commodity prices will continue to appreciate, since such large-scale projects generate a high demand for various natural resources.”

AGI take a differing view.

They note: “Commodity prices have seen arguably the biggest moves of any asset class in the giant post-Covid global reflation trade.

“They are often interpreted as a global growth barometer.

“There comes a point, however, when the high cost of commodities stops being an indicator of current strong growth, and begins to hamper future economic activity. Higher commodity prices have historically often been a portent of weaker economic growth about five months later, and lower commodity prices often help set the stage for a rebound in global growth.

“The rationale for this relationship is as follows – commodities are an input cost for most firms, so higher commodity prices squeeze profit margins. Lower profit margins in turn lead to a reduction in investment. Higher commodity prices (namely oil) also reduce real incomes for households.

“Right now, the chart is flashing a major warning sign for global economic growth from the middle of this year.”

Asset classes, which are priced for a continued economic recovery, could be “in for a shock”.