Video: Why we are still bullish on commodities – Asset Management
Commodities globally have posted robust returns in recent years, leading many to wonder how long this performance can be sustained.
Commodities remain cheap, both on an absolute basis and on a relative basis compared to other asset classes like stocks.
We see similarities to previous periods of prolonged commodity market strength. The geopolitical stress we are witnessing today, emanating from Russia’s invasion of Ukraine, mimics the 1970s when the Arab oil embargo of 1973 and the Iranian revolution of 1979 led to a huge cross appreciation of raw material prices.
The early 2000s was another period of strong upward trends in commodity prices. Then, underinvestment in commodity supply, growing demand from emerging markets and high equity valuations made commodities look cheap on a relative basis.
The drivers for these factors are different, but the conditions are very similar, which is why we believe a similar period of price uptrends will follow.
Perhaps what gives us the greatest conviction about commodities as an asset class is not the similarities to historical bull markets, but the differences.
In particular, we continue to believe that the global focus on climate change mitigation strategies and decarbonization is limiting the supply response to rising prices to an unprecedented extent. This severance of the link between higher prices and a supply response is likely to significantly extend the commodity bull market.
When we combine these factors with our belief that we are entering a fundamentally more inflationary era, the case for a broader commodity allocation remains compelling.