Backing the commodities trade
Having been in the eye of the storm last year, as lockdowns globally weighed heavily on demand, commodities are back in vogue.
Currently benefitting from a better than expected economic recovery, there are both short and long-term trends at play for the asset class. We have growth in money supply, rock bottom interest rates and fiscal stimulus – all of which have boosted inflation expectations.
If you believe in the inflation trade - with central banks spending their way out of trouble - real assets like commodities are an attractive option. Add the potential for a weaker US dollar, growing demand for commodities in China and the need for metals to make strides in tackling climate change, then the benefits are clear.
China is a good starting point – first in and first out of lockdown, the Chinese Caixin manufacturing purchasing managers’ index (PMI) reached a ten-year high of 54.9 in November 2020 (anything above 50 implies growth). This has since fallen back slightly, but still represents significant activity – and demand for commodities as a result. The same is happening in the UK and Europe, where pent up demand is bolstering manufacturing*.
The fiscal and monetary support being made available by governments and central banks in the wake of Covid-19 is also supporting asset prices, including commodities. A good example of this is the oil price, where government support and a successful vaccine newsflow have seen the prices recover from below $20 a barrel 12 months ago to around $60.
The green recovery is also a long-term trend, which appears to have been accelerated in the wake of the pandemic. Investment in energy transition is driving up the prices of metals that will be crucial to a successful transition. Two examples which stick out are copper and lithium. The latter is used in electric car batteries and the world currently mines around 400,000 tons of lithium a year - enough to power 2-3 million EVs. That number would need to increase significantly when you consider China recently revealed its plans to boost new energy vehicle market penetration to 20% by 2025**.
Copper is also needed across a wide range of energy transition applications, from electric cars to carbon capture and storage. It is also integral across new and old infrastructure builds, which will be a key part of the recovery as government’s look to provide jobs through infrastructure.
Agriculture is also a long-term story. It’s not just that the global population is increasing, but within that the middle class is growing too – a middle class that can afford a higher quality of food.
Last, but certainly not least, is gold and silver. These were two of the success stories of 2020 – with the former topping $2,000 an ounce for first time***. Although both now look expensive, the emerging markets recovery benefitting consumer demand, central bank demand not wavering and improved mine production, do benefit the gold story in particular, indicating more mileage.
Although we cannot ignore the threat of further lockdowns, there is optimism that this scenario is diminishing and that the recovery story is likely to continue, benefitting commodities over the short and longer-term.
Offerings to consider include the Jupiter Gold & Silver and Ninety One Global Gold funds. Industrial metals can be tapped into through Latin America – through the likes of ASI Latin American Equity - and emerging markets, in the shape of the Fidelity Asia Pacific Opportunities fund.
*Source: Schroders - Will rising commodity prices prompt a shift for equity investors?
**Source: ING – Commodities 2021 – Let the good times roll
***Source: BBC News – 4 August 2020 – Gold Price Rises Above $2,000 for the first time
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.