With the path toward a more sustainable future depending heavily on commodities, we feel strongly that their place in a well-diversified and resilient core portfolio is secure.
What are we seeing?
Inflation may have peaked in the US for this cycle. Nevertheless, the final leg back to 2% could prove to be a grind as persistently tight labor market dynamics and resilient consumer demand keep pressure on prices. Commodities, known for their sensitivity to inflation, should remain buoyed in this environment.
With the US Federal Reserve nearing the end of its rate-hiking cycle, the US dollar may lose a key pillar of support in 2024, potentially leading to a pullback in the greenback. Dollar weakness has historically coincided with tailwinds for commodity prices: When global buyers pay less in local currencies to acquire the same amount, that tends to increase demand for commodities. Even if the dollar were to trade sideways from here, that would remove a significant hurdle from the market.
Outside the US, struggles in China remain top of mind for investors as the country seeks to rebound from property sector woes. The future path of economic growth for the world’s largest consumer of commodities will undoubtedly be an important determinant of where prices go from here.
We think India deserves equal attention. Having overtaken China’s population in 2023, and with 2024 growth projections nearing 7%, India may be the next great economic power ... and the next top consumer of commodities.
What are we doing?
We are sticking to our time-tested approach of providing diversified commodity exposure, which we believe has the potential to help lower portfolio volatility and may lead to more consistent performance over the long term. Commodity prices are challenging to predict in the short term, and we are skeptical that forecasting techniques can improve trading decisions in an asset class with significant levels of volatility.
A key component of maintaining a balanced portfolio is to rebalance as underlying exposures rise and fall with idiosyncratic noise. Our process seeks out opportunities to “buy low” and “sell high” in a systematic, rules-based manner.
In pursuit of broad diversification, we continue to evaluate and monitor developing commodity futures markets, with a particularly close eye on those enabling the low-carbon transition, such as lithium, cobalt, or even carbon emission allowances.
What are we watching?
The world is now facing a challenging transition to renewable energy, which will take shape over years and potentially decades to come. We see early signs that an electric revolution may be underway. For instance, the adoption of electric vehicles (EV) is booming, with the International Energy Agency expecting sales to leap 35% this year and S&P Global Mobility forecasting EV sales in the US to reach 40% of total passenger cars sold by the end of the decade.
Somewhat ironically, the path toward a more sustainable future likely depends heavily on commodities—for example, electric batteries require six times as many minerals as internal combustion engines. We anticipate a robust green demand environment ahead. The crucial question is whether natural resource producers will have incentives to respond in the form of new capital investments, or will they continue to favor cash distributions to shareholders.
The bottom line
Looking ahead, we feel strongly that the place of commodities in a well-diversified and resilient core portfolio is secure, offering balance when held in combination with traditional assets such as stocks, bonds, and cash.