How to use commodities as a hedge against stubborn inflation
There are many reasons to be positive on commodities including supply constraints, the net zero transition, and their historical correlation with inflation.
That’s the view of the commodities team at PIMCO who believe that there is potential for investors to add commodities to their portfolio now as a hedge against core inflation which remains elevated globally even as headline inflation has started to ease.
In an article for the firm’s blog, commodities and real estate economist Michael Haigh, and portfolio manager Greg Sharenow say that history shows that when “spare capacity and investment is limited prior to a recession, supply constraints tend to emerge once demand growth resumes.”
That means that long-term investors in commodities could see weakness ahead of mild recession as a chance to guard against inflation. Additionally, the transition to a net zero economy will require a lot of commodities with tight supply driving up prices in the years ahead.
For energy, there are also supply issues ahead with capital investment well below where the International Energy Agency says it should be. This, together with a slowdown in US shale production, means OPEC will be in a stronger position to influence prices.
With China yet to fully rebound from Covid restrictions and high demand from developed economies, energy commodities are expected to remain positive.
Agriculture and metals
Beyond demand for fuel, the PIMCO team sees potential in long-term growth in agriculture and metals.
For agriculture, good weather will be crucial in supporting harvests which have been impacted for two years by extreme weather. Climate change is also impacting the sector and is therefore supportive of prices.
The transition to net zero is a long-term positive for metals but in the short term there may be some weakness due to a slowdown for China’s construction sector.
However, there are low supplies of some key metals currently and adding supply requires both capital and time.
The full article can be read on the insights section of Pimco.ca.
