Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 562

The bull market in commodities may be just starting

Introduction: Robert M. Almeida is a Global Investment Strategist at MFS Investment Management. James Gruber interviewed Robert after his appearance on a panel at Morningstar's Investor Conference in May.


James Gruber: Robert, you talk about a new paradigm, a higher cost environment that might be with us for a while. Is that structural or cyclical in your view?

Robert Almeida: I think it's structural. So what ended was an era of suppressed costs [and] interest rate suppression, but also globalization. I think what's changed now is while central banks may cut rates because inflation's coming down, what you're going to see is longer rates where companies and households borrow at. I think that's going to be higher than it was last cycle.

And globalization hasn't ended, but it's shifting. So as companies have to shift supply chains, that requires capital, that requires spending, that requires people. We're in a world now where costs, I would argue, are a bit more normal. That's going to have a different effect on P&Ls than what you had in a suppressed cost environment. So I think it's structural.

Gruber: A longer term theme, though, rather than a short term one? Or do you think it's already starting to play out as we speak?

Almeida: It's playing out now, but not in financial markets. I don't think risk assets have discounted that because what risk assets tend to do, as you know, is they focus on what has happened and then look out the next, say, three to six months. But when we think about this being a structural and longer term thing, once financial markets start discounting it, you're going to get a very different behavior pattern. But I don't think it's in asset prices yet.

Gruber: Which sectors do you believe will benefit from this?

Almeida: Capital goods. Throughout the 2010s, the reason it was such a low growth, low inflation environment is people weren't spending, whether that's households or companies. So we didn't build enough infrastructure. If you think about some of these mega trends, the reshoring that we mentioned, but also artificial intelligence, it requires a lot of equipment. So companies tethered to that. Companies that supply parts, goods, equipment to go into an EV factory or gigafactory. Or [companies that] support AI hyperscalers or the building of manufacturing plants outside of China. Capital goods, industrial companies, electric equipment makers, they're in the midst of that.

Gruber: And I imagine also those that have the ability to raise prices in that higher cost environment.

Almeida: Yeah. Every company has fixed costs that they have to absorb. So a dollar in has to go to some level of fixed costs. The last customer is always the most profitable because once fixed costs get absorbed, each new dollar is incremental profitability. But now as we enter into a higher cost world, the differentiator in financial markets will be those companies who have something that people want that's in relatively short supply. They'll be able to raise prices to offset those other higher structural costs. Conversely, those companies that can't, or don't because their product isn't good enough or there's just too much competition or the business just can't support those higher costs, those companies are going to have a very different financial outcome.

Gruber: Which sectors are the most at risk in this new environment?

Almeida: Coming out of the global financial crisis, obviously banks and households were deleveraging their balance sheets. Then what happened was sectors across technology, staples, industrials, et cetera were using cheap financing and globalisation to drive high profitability. In the 90s we built too much IT hardware and it was the technology sector that was at risk. In the 2000s we built unproductive homes, particularly in the United States. So it was the consumer and financials and banks providing the financing that were at risk. This time it's more ubiquitous. I think businesses that are offering a product or a good that can be commoditised or copied by others [are most at risk] and I think that risk exists across a lot of sectors. It's a lot harder to pinpoint versus prior cycles.

Gruber: How does AI fit in? I imagine that It is sucking in a lot of capital, yet there's a fair bit of growth in the meantime?

Almeida: I think about AI through few different lenses. So if you think about the hyperscalers today, they are spending a tremendous amount of money. If we take them at their word, those capital investments could be US$700 billion, US$800 billion over the next four or five years. How many other technology companies have the financial firepower to be able to keep up with that? Not a lot. So to maybe go back to your earlier question, software companies that sold code, AI will do it for free. Those companies that don't have the firepower to keep up are the assets most at risk. Then on the other side, a lot of investors are making this assumption that all companies are going to be more productive. I think there's something to that. However, the flip side to that coin is companies we've never heard of or maybe don't even exist today. AI allows them to enter the marketplace. That increases competition, increases commoditisation risk. So I think it's a two-edged sword.

Gruber: How does geopolitics fit into all this? What are the risks there? They seem to be increasing.

Almeida: I think about it from wants and ability. What a politician wants to do might be different from what they're able to do. In my country [the US] we have a very important election coming up later this year. It is hard to underwrite both the outcome and what whoever wins will want to do. What will matter is the balance of Congress relative to who wins and what they're able to do. I guess whether it's President Biden or Donald Trump, each of them want to stimulate. A lot of politicians love fiscal stimulus. They saw how much it worked. I'd argue it was more of a short-term thing but they saw how much it worked and they're going to want to stimulate. But what's their ability to stimulate now with yields elevated, deficits elevated? Bond investors need to be compensated for that. So that's a different environment. It's hard to underwrite what those outcomes will be but I think wants and ability are going to be more constrained than they have been.

Gruber: Final question, commodities, where do they fit into the picture of a higher-cost environment?

Almeida: Commodities are beneficiaries and you're seeing that in commodity prices today. As we go from a single polar world where the U.S. was providing safe shipping lanes to a world with more conflict and at the same time increasing protectionism, demand for resources grows. There's ultimately just less sharing and more demand for those goods. Particularly we just have a lot of stuff we need to build to support those mega trends and stuff that we need to build just for a greener world of less pollution. That requires resources and I'm not sure we have enough.


For more articles featuring Robert M. Almeida, please see MFS Investment Management's sponsor page.



Most viewed in recent weeks

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Latest Updates


Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Exchange traded products

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.


The new retirement challenges facing Australians

A new report from Vanguard has found an increasing number of Australians expect to be paying off a mortgage in retirement, or forced to rent. A financially secure retirement is no longer considered a given.


Why aren’t there more Warren Buffetts?

Warren Buffett is widely regarded as the most successful investor ever. Rather than keep his secret sauce hidden, he's shared his knowledge for decades, so why aren't more investors able to replicate his methods and success?


Finding joy in retirement

Retirement can last more than 30 years, necessitating thoughtful planning. Many miss workplace friendships, identity, status, expertise, and routine, but these can be replaced with renewed activities and purpose.


Bull and bear case for Australian equities for FY25

ASX market bulls point to corporate balance sheets and earnings, while bears highlight company valuations and persistently higher inflation. It's best to ignore short-term noise and focus on investing in quality companies.


How gold can help diversify your portfolio

As inflation is likely to remain stubbornly elevated, the correlation between bonds and equities could remain high, reducing diversification within portfolios. A gold allocation may help to better protect your investments.



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.