Dubai
Commodities are back in vogue on the back of expectations of increased inflation.
Oil prices hit their highest level since 2014, copper saw a peak not seen in the past four years, while agricultural commodities like corn and wheat witnessed their highest levels in months due to supply issues. And that has triggered interest in the commodities complex, which was unseen in the past 2-3 years.
“There is a lot greater interest in commodities than there was 2-3 years ago. About three years ago, the interest in commodities was probably on a scale of 1-10 was 1, it’s now about 3-4, which is the best time to buy,” Christopher Wyke, product director, commodities and Emerging Market Debt (EMD) Absolute return, Schroders, told Gulf News in an interview. Schroders has four commodities-based funds, which invest in 50 different commodities, and has $1 billion in assets under management.
“We have flows of funds into our commodities fund. We have seen flows of funds in agricultural funds in the first quarter. The interest is certainly there,” Wyke said.
And the demand has been prompted by rising inflation, and commodities are considered as the best hedge against inflation.
“We like commodities from the perspective that they are the best hedge against inflation. We like commodities because they are cheap. If inflation is picking up, bonds and equities are expensive, people want to diversify and commodities look cheap in an investment world where very little looks cheap,” Wyke said.
“Commodities offer investors a sweet spot in an otherwise cloudy outlook for equities and bonds,” he added. The Dow Jones Industrial Average has returned 0.20 per cent so far in the year after stellar performance last year. The US 10-year bond gave 3 per cent yields, its highest in many years, while the Bloomberg commodity index has gained 3.27 per cent so far in the year after 9 per cent gains last year.
Oil, gold:
Schroders expect gains in Brent crude prices to be limited to $80 per barrel on the back of limited supply and rising demand.
“We believe that oil prices should remain firm this year and we may well see $80 a barrel but not much beyond that,” Wyke said.
Schroders expect 1.6 million barrels of oil per day of increase in demand, compared 1.3 million barrels of oil per day of increase, which is an average demand figure for 25 years.
“We expect Opec to have flat production, because they have been disciplined with production cuts,” he added.
Schroders expect gold to hit $1,500 an ounce from $1,320 currently.
“Gold is very good hedge against inflation, falling dollar and US equity prices falling. If equities fall by 20 per cent, one thing that would go up is gold in the short-term,” Wyke said.
“People have had nothing in commodities for the past few years. And the question is if inflation is going, what is there in your portfolio that offers protection, and the number 1 historical protection against inflation is commodities,” he added.
In all, commodities will stand to benefit the way the macroeconomic fundamentals are stacked up.
“Commodities tend to be a late cycle play. At the end of the cycle if we are going to see inflation rise and dollar falling. And then you have Trump, whose main aim is wage increase, which is inflationary. The other fiscal expansion will also add to inflation. Whatever Trump is doing is inflationary, and that will benefit commodities,” Wyke said.
