Is this the start of a new commodities supercycle?
Commodities are an excellent non-stock-specific way to play recovering markets, and hedge against inflation. Demand is likely to be robust in the coming decade owing to supportive central bank stimulus, a weaker dollar and a shortage of supply as energy firms and miners have cut exploration budgets. For example, copper prices recently hit a seven-year high, as Chinese demand for electric cars soared. Electric vehicles need three or four times more copper than a combustion engine car, more if you count the charging infrastructure.
Goldman Sachs, which has called the start of a new commodities supercycle, has forecast a return in 2021 of about 27% on the S&P/Goldman Sachs Commodity Index (GSCI), with a 19.2% return for precious metals, 40.1% for energy, and 3% for industrial metals. The bank’s targets for gold and silver are $2,300 and $30 an ounce, respectively, as solar installations are boosting demand for silver. In mining, consider BlackRock World Mining (LSE:BRWM) or the smaller BlackRock Energy and Resources Income (LSE:BERI) investment trust. A basket of commodities is also easy to access via ETFs such as Invesco LGIM Commodity Composite (LSE:LGCF) or L&G Longer Dated All Commodities (LSE:CMFP) funds.
“Commodities cover a broad spectrum but the one investors are most likely to include in their portfolios is gold,” says Scott Thompson, investment analyst of manager selection services, at Morningstar. “Gold prices remain high having had a strong run-up. However, central bank stimulus is likely to extend for a lengthy period and the inflation/devaluation of currencies that this brings should aid gold prices.
“Gold retains some properties of a safe-haven asset, but comes with higher levels of volatility and increased levels of retail speculation may exacerbate this. The price run-up may suggest that unlimited fiscal stimulus is priced in, and if central banks are unable to coax growth and inflation out of their economies, as they have in recent times, then the reflation trade may never materialise.”
New disruptive technology has also pushed up the S&P Global Clean Energy Index by more than 100% in 2020, compared with the S&P Global Oil Index, which tracks 120 companies in oil and gas exploration and production, which fell 27% over the same period (to mid-December). The sector includes not only infrastructure projects, such as solar panels and wind farms, but waste management and sustainable agriculture, forestry and water. The top-performing ethical fund over 10 years is Royal London Sustainable Leaders, which has risen 200%. The fund is one of interactive investor’s ACE 40 options.
“The most crucial driver has been the dramatic improvement in the competitiveness of clean energy technologies, to the point where they require little or no subsidy to compete with fossil fuels,” says Alex Tedder, chief investment officer of global and US equities at Schroders.
“Investments to displace combustion engine vehicles and fossil-fuel power generation are ramping rapidly, and the next five years will be a critical inflection point. The automotive sector is set for very rapid change, with accelerated adoption of electric vehicles, taking penetration up towards 50% of global new car sales in 10 years, and eventually close to 100%. More broadly, the transition to a green economy will offer tremendous opportunities as investment builds and adoption rates surprise on the upside.”
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