Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 559

Why commodities deserve a place in portfolios

Take out the second half of 2023, when we moved to a neutral view, and we have been positive on commodities since way back in October 2020. At the time, we cited the ‘reflationary forces’ likely to be unleashed as we left the worst of the COVID-19 pandemic behind us. A few weeks later came news of a successful vaccine.

A lot has happened since then. So, why have commodities been such a persistent overweight view, and why do we continue to favour them for the year ahead?

Disruption

We think commodities tend to do well in three environments.

In a reflationary environment, economic growth is rebounding from a slowdown and consumers and corporations restock depleted inventories, generating steadily rising demand for commodities.

An inflationary environmentor, more precisely, an unexpected spike in inflationis largely caused by rapidly rising commodity prices, whether due to an unexpected disruption of supply or an unexpected burst of demand.

Finally, commodity prices often rise in a geopolitically volatile environment. This can be due to conflicts or disputes causing actual supply disruptions, and subsequent spikes in inflation, particularly if those tensions erupt in key production or transit areas for critical commodities like oil. But consumers often start paying a premium to secure supply even at the mere fear of disruptionand gold often benefits as a perceived catch-all tail-risk hedge.

A supportive backdrop

In 2021, the reflationary escape from the pandemic steered our view. In 2022, we upgraded our view to the highest overweight, anticipating reflationary forces becoming inflationary: An unexpected burst of demand fueled by fiscal stimulus packages ran up against the constraints of disrupted supply chains; and Russia’s assault on Ukraine made the geopolitical environment much more volatile.

Last year could have seen geopolitics stabilize around a stalemate in Ukraine, and rapidly rising interest rates trigger a disinflationary economic slowdown. That is largely why we shifted to a neutral view over the second half of 2023. Instead, economic activity moderated but proved much more resilient than many had expected, and the Hamas attack on Israel added a second major geopolitical flashpoint in a commodity-rich location.

The result is that 2024 looks set to be another year of reflation and geopolitical uncertaintywith the latter significantly raising the tail risk of a return to problematic inflation. In our view, that’s a supportive backdrop for commodities, as both a core exposure to economic growth and a hedge against inflation surprises.

Reflation

The asset class has certainly been making headlines. Crude oil and gold are up 18% and 16%, respectively, since the start of the year. Unprecedented deficits in the cocoa market, caused by poor weather and crop hoarding, have seen prices in this commodity run up by 140% so far this year.

Our base scenario is reflationary: sticky inflation and a global economic recovery leading to relatively high nominal growth. This could be positive for both equities and commodities.

The last three weeks have given us another blow-out U.S. payrolls report, the third hot U.S. inflation release in a row, exceptionally strong U.S. retail sales, and the latest in a series of upgrades to the International Monetary Fund’s global growth forecasts. Even China, a persistent laggard since the pandemic, has managed to stimulate forecast-beating first-quarter growth of 5.3%. The 2023 manufacturing recession appears to be behind us, and Europe, in particular, has begun to restock after running down its commodity inventories.

We think this backdrop favours energy and industrial metals.

Typically, oil demand grows at about half the rate of the global economy. Inventories have been drawn down at a faster-than-normal pace over the past six monthsand given current outlooks for expansion, we think demand could increase by around 1.55 million barrels per day this year. Given OPEC’s cautious production approach, and little prospect of U.S. shale oil stepping into the breach, it could be a significant challenge to meet this demand.

Structural demand for copper and other industrial metals is already strong, in our view, as they are critical for the electrification and decarbonization of the economy, as well as for the build-out of 5G and datacenter infrastructure. The turn in manufacturing adds a cyclical impetus, and these commodities have also tended to benefit the most from non-recessionary rate cuts.

Risks

Among the risks to this reflationary scenario, the two we consider most likely would be supportive of commodities, in our view.

The first is geopolitical volatility. The recent escalation of Israel-Iran tensions highlights the vulnerability of Iranian oil and the flow of oil through the Strait of Hormuz. Although a complete closure by Iran is improbable, due to Oman’s control over the shipping lanes, we see heightened risk to oil infrastructure and supply routes from proxy actions.

The war in Ukraine still poses threats, too. Ukrainian attacks on Russian refineries are causing significant disruption, and Russian export facilities are also at risk. There are also new sanctions on Russian-produced metals to contend with.

Meanwhile, beyond the front-page geopolitical risks, more localized political risks can also cause outsized disruption. Take the Cobre copper mine in Panama, for example. Its owner, Canada’s First Quantum, has been forced to close it following public opposition and a ruling from the country’s Supreme Court that the terms of its contract were unconstitutional. This could remove as much as 2% from global copper supplies, which were already looking constrained due to large cost and production cuts from Anglo American.

The second risk is a return of problematic inflationor the related risk of systemic volatility caused by debt-sustainability concerns or a loss of confidence in fiat currencies. Along with the deteriorating situation in the Middle East, this appears to be the main driver of the 2024 gold and silver rally. We see precious metals not only as beneficiaries of the structural decarbonization trend, but as hedges against the potential for the reflationary cycle to become uncomfortably hot.

Unique backdrop for outperformance

We believe the backdrop of sticky-but-declining inflation and high nominal growth is largely positive for risky assets, but that full valuations in some parts of the market, together with inflation and geopolitical tail risks, support a broad and balanced exposure.

That creates a meaningful role for commodities in a portfolio, in our view. Thanks largely to the diversity within the asset class and its unique supply-and-demand dynamics, we believe it is one of the few investments that stand to benefit from our base scenario for 2024 while also having the potential to outperform significantly should tail risks to that scenario be realized.

 

Erik L. Knutzen, CFA, CAIA and Managing Director, is Co-Head of the Neuberger Berman Quantitative and Multi-Asset investment team and Multi-Asset Chief Investment Officer, and Hakan Kaya, PhD, is a Senior Portfolio Manager. Neuberger Berman is a sponsor of Firstlinks. This information discusses general market activity, industry, or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. It is not intended to be an offer or the solicitation of an offer.

For more articles and papers from Neuberger Berman, click here.

 

RELATED ARTICLES

Not all private markets are ‘volatility laundering’

Asset Class Gameboard shows all good things must end

Investing across deflation, inflation and stagflation

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 606 with weekend update

The boss of Australia’s fourth largest super fund by assets, UniSuper’s John Pearce, says Trump has declared an economic war and he’ll be reducing his US stock exposure over time. Should you follow suit?

  • 10 April 2025

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Latest Updates

Investment strategies

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Investment strategies

Does dividend investing make sense?

Dividend investing offers steady income and behavioral benefits, but its effectiveness depends on goals, market conditions, and fundamentals - especially in retirement, where it may limit full use of savings.

Economics

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Strategy

Ageing in spurts

Fascinating initial studies suggest that while we age continuously in years, our bodies age, not at a uniform rate, but in spurts at around ages 44 and 60.

Interviews

Platinum's new international funds boss shifts gears

Portfolio Manager Ted Alexander outlines the changes that he's made to Platinum's International Fund portfolio since taking charge in March, while staying true to its contrarian, value-focused roots.

Investment strategies

Four ways to capitalise on a forgotten investing megatrend

The Trump administration has not killed the multi-decade investment opportunity in decarbonisation. These four industries in particular face a step-change in demand and could reward long-term investors.

Strategy

How the election polls got it so wrong

The recent federal election outcome has puzzled many, with Labor's significant win despite a modest primary vote share. Preference flows played a crucial role, highlighting the complexity of forecasting electoral results.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
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.