Commodities Deep Dive: Time to cop some copper?

To date, the IA Commodity/Natural Resources sector is the best performer this year, returning 8.5% overall, according to FE Analytics data. This is a long way ahead of the worst performing sector, IA Technology and Technology Innovations sector, where the average fund has lost 26.6% over the same time frame.

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Aneeka Gupta, director of macroeconomic research at WisdomTree, said: “Historically, commodities have performed well amidst a rising inflationary and a higher interest rate environment.”

They have also been one of the few beneficiaries of the war in Ukraine, which “revealed that the world is facing an energy crisis”, she said.

With Russia being one of the main suppliers of oil and natural gas globally, sanctions on Russian assets have pushed energy prices, which had already been increased by inflation, to decade highs. Indeed, Brent crude surpassed $110 (£90.17) days after Ukraine’s invasion.


Prior to 2022, however, commodities received less attention since it was considered a one-way trade in equity markets. Backing growth and tech stocks was the go-to option and served investors well when macroeconomic headwinds were minimal.

But the macroeconomic and political volatility this year has reminded investors of the importance of owning these assets to create a balanced portfolio, as Sophie Burke-Murphy, investment director at Featherstone, pointed out.

“Traditional investments, namely equities and bonds, have become increasingly correlated leaving investors exposed. An allocation to commodities can play an important role due to their low correlation to traditional investments,” she said.

She added that the driver of returns for precious metals, industrial metals, energy and agriculture “are different, motivated by demand and supply and, as such, they can offer genuine diversification in a portfolio”.

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Among those listed, gold has been one of the most well-known assets within the universe and has long been hailed as the classic, safe haven option for volatile markets. This is why it forms a key part of Caroline Shaw’s non-sustainable focused multi-asset portfolios at Fidelity International. She said gold has worked well in defending the portfolios “against choppy markets”.

“We took some profits on gold in mid-March but retained a core position noting that exposure to the US dollar would also be helpful to a sterling-based portfolio. This proved to be the case as, whilst the gold price has trended sideways since April, the US dollar has been strong versus sterling, helping sterling portfolio returns,” she noted.

However, it is not a simple trade, as Shaw explained that higher real and nominal yields could be a headwind for gold in future, making them less attractive.

“As a result, we are closely watching the Fed’s current tightening cycle. If the Fed becomes less hawkish due to growth slowing or recession fears, it would likely be positive for the yellow metal,” she said.

Commodities in general are a more volatile asset class, Burke-Murphy said, and “careful consideration” is needed to manage risk exposure.

The future: Energy transition

The long-term picture for commodities is focused on the energy transition, which post-Ukraine war has become an even more pressing issue, Gupta said.

A lot of capital expenditure has been pledged to renewable energy projects already and has become a core focus of government agenda, with net-zero goals a common campaign.

$243bn was spent on renewable energy projects in 2021, according to Rystad Energy, setting a new record.

Even during Covid it was a core concern. The European bloc channelled its Covid Recovery fund through its already-established European Green Deal, meaning that the largest economic stimulus in EU history was built around a desire to combat climate change.

Europe is one of the most vulnerable areas to the fallout of the Ukraine-Russia war, Gupta said. Just this week, there have been warnings of blackouts in the region and talks of rationing the energy supplies.

“This [war] has exacerbated Europe’s need to power ahead with its energy transition,” she added.

For this energy shift to occur it will require a lot of raw material and metal, and the latter is one area Gupta is bullish on long-term.

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Burke-Murphy went down a similar path, taking a structural position in copper via the WisdomTree Copper fund.

“Our view is that over the next few years the demand for copper is going to outstrip supply. Copper is fundamental to the infrastructure required for carbon reduction and the drive towards clean energy. It is also a key component used in electric vehicles as an efficient conductor of electricity,” she said.

Burke-Murphy added that although this exposure would be “volatile as it is sensitive to a slowdown in global growth”, she thinks that the long-term supply and demand imbalance “justifies its place in our portfolios”.

But not all managers agreed on the copper outlook.

Mark Smith, manager on the TB Amati Strategic Metals, said that the energy transition would for sure be metal-intensive, but he was avoiding the industrial metal sector — and copper in particular — when recession and stagflation worries are high.

He said one of the reason why markets were pulling back on risk assets such as crypto, and some economically sensitive commodities like copper, is because of concerns that the Fed will raise rates “into outright ‘restrictive’ territory”, leading to “collateral damage and consequence”.

Instead, he was focusing on other opportunities, such as lithium, which is a key component in the batteries for electric vehicles.

“Lithium prices have rebounded substantially since September 2020 on higher than expected electric vehicle sales and an improving supply demand outlook,” Smith said.

But the supply-demand outlook is “tight” at present, according to data from Bloomberg New Energy Finance (BNEF) and its latest annual electric vehicle outlook. They noted that the electric vehicle battery demand is rising sharply, with shipments up 94% in 2021.

This is causing a “squeeze” on the metals used, including lithium, for which Bloomberg is forecasting a 259% increase in current demand by 2030.

For Smith, his play on this is Sigma Lithium, which is developing hard rock lithium deposits in the Americas to be used in the electric vehicle supply chain.

Long term, Smith said he “may be conservative on the pricing that we use in our financial modelling, which is 65% below the current spot price”.

In general, the outlook for commodities appears positive in comparison to bonds and equities and is moving beyond the ‘classic’ options, with hydrogen and carbon capture more realistic ideas now.

Shaw concluded that she expects most sectors, including energy, industrial metals and agriculture, to perform strongly this year.

“The supply of many commodities, particular food and energy, has been severely disrupted by the war in Ukraine and shows little sign of improving soon, while demand will be boosted by the gradual easing of Covid lockdowns in China,” she said.

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