Over the past several years, commodities have tended to fly well below investors’ radar, while exposure to stocks and bonds has been more favoured. But according to one major fund firm, commodities may be due for a re-evaluation.
“Investors were disinterested, and who could blame them? The performance of the asset class was nothing short of awful,” wrote Joseph Tenaglia, asset allocation strategist for WisdomTree, in a new note. “That said, we now have a few reasons to finally be positive on the asset class.”
Citing his fellow strategist Jeff Weniger, Tenaglia said that commodities are due for a mean reversion after a decade of disappointing performance. Prospective tailwinds for the asset class include continued weakness in the US dollar, as well as China’s Belt and Road initiative — a project that some estimate could reach US$8 trillion in expenditures — and an infrastructure bill being floated by US President Donald Trump.
From a structural perspective, Tenaglia noted recent improvements in roll yields for several contracts, as well as an uptick in collateral returns of commodities futures contracts due to the Federal Reserve’s continuing rate-hike trajectory.
“With the potential for faster economic growth and with increased Treasury supply that could help moves rates higher, the possibility of inflation coming back has risen,” he added. “The most obvious connection between the two is that commodities are commonly viewed as a natural hedge for inflation—and that inflation is often driven by rising commodity prices.”
Tenaglia argued further that a coordinated first-quarter selloff in both stocks and bonds points to an increased correlation between the two asset classes, meaning the classical 60/40 balanced portfolio may be due for a reassessment. In addition, he said, periods of upward inflation have historically tended to be “the precise times when commodities not only maintain their value, it also marks when they outperform the traditional 60/40 portfolio.”
“When analyzing potential vehicles in which to invest, we’ve found that some of the largest commodity mutual funds and exchange-traded funds (EFTs) are concentrated in contracts related to energy and oil,” Tenaglia said. “While the price of a barrel of oil is undoubtedly important, just as with all other asset classes, we think diversification is key.”
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