Commodities globally have posted robust returns in recent years, prompting many to ask how long this performance can be maintained.
Commodities remain cheap, both on an absolute basis and a relative basis to other asset classes like equities.
We see similarities to previous periods of extended 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 drove huge cross commodity price appreciation.
The early 2000s were another period of strong bullish price trends in commodities. Then, under-investment in commodity supply, growing demand from emerging markets and expensive equity valuations made commodities look cheap on a relative basis.
The drivers behind those factors are different but the conditions are very similar, which is why we think a similar period of bullish price trends to follow.
Perhaps what gives us the highest conviction on 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 mitigation strategies and decarbonisation is limiting the supply response to higher prices to an extent that is unprecedented. That breakage of the link between higher prices and a supply response is likely to significantly extend the commodities bull market.
When we combine these factors to our belief that we are entering a fundamentally more inflationary age, the case for an enlarged commodities allocation remains compelling.