Ten Reasons Why Commodities
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10 Reasons Why Commodities LAZARD GLOBAL COMMODITIES 1. Build a bridge to the new economy Commodity trading is indispensable in the production and delivery of the fossil fuels that power today’s economy, and it will be equally indispensable as energy markets evolve. Global futures markets are developing for the trading of carbon allotments as well as wind and solar power. And even now many of the components of tomorrow’s transport—such as the rare metals used in batteries for electric vehicles—trade on futures exchanges. 2. Invest in the global recovery Commodity returns rise fastest when business confidence returns and the pace of economic growth begins to quicken. Base commodity demand does not vary—people have to heat and eat regardless of economic conditions. As the business cycle revives, as it has recently, incremental demand should surge. 3. Profit from inflation Rising Inflation Just as rising commodity prices drive Average Month-on-Month Change (1990–Present) consumer price inflation, they also drive (%) Commodities Equities Bonds commodity returns. No other asset class 2 responds more or more consistently 1 to heightened inflation and inflation 0 expectations. At low inflation levels like those -1 currently, commodities have historically -2 -3 delivered positive returns in contrast to 1%–2% Inflation 2%–3% Inflation 3%–5% Inflation 5%+ Inflation equity and fixed income markets, and these (25 Months) (53 Months) (73 Months) (11 Months) returns have remained positive when inflation As of 30 November 2017 Inflation was rising in 167 months and not rising in 167 months. Months of rising has become extreme. inflation are defined as those in which the year-on-year % change in CPI exceeds its 12-month moving average. Commodities are the S&P GSCI Total Return CME. Equities are the MSCI World Index. Bonds are the Bloomberg Barclays GlobalAgg Total Return Index Value Unhedged USD. Source: Bloomberg, Bureau of Labor Statistics, Haver Analytics Commodities Outperformed when Rates 4. Stay ahead of rising rates Were Rising Unlike stocks and bonds, interest rates have not directly Average Month-on-Month Change (1990–Present) affected commodity returns. As a result, they have (%) complemented intermediate and long-duration bond 1. 5 Commodities Equities Bonds allocations, which typically lag as rates increase. 1. 0 0.5 0.0 -0.5 Fed Funds Rate Rising Fed Funds Rate Not Rising (100 Months) (235 Months) As of 31 December 2017 Commodities are the S&P GSCI Total Return CME. Equities are the MSCI World Index. Bonds are the Bloomberg Barclays GlobalAgg Total Return Index Value Unhedged USD. Source: Bloomberg, Federal Reserve Board, Haver Analytics 2 5. Take advantage of a Global Infrastructure Needs Are High $49 trillion opportunity US$49.1 Trillion in Aggregate After the global financial crisis, infrastructure (% of Global GDP) 4 maintenance took a back seat to financial Telecom reconstruction. Roads, railways, and bridges fell into 3 Water disrepair. Altogether, according to a study by the McKinsey Global Institute, the recovering global 2 Power Airports economy has accumulated a US$49 trillion backlog of Ports Rail infrastructure projects. Meeting this critical challenge 1 Roads promises to vastly increase demand for industrial 0 commodities like copper, cement, and steel. As of 31 December 2017 Source: McKinsey Global Institute, “Bridging Global Infrastructure Gaps”, June 2016. Data displays the expected aggregate need between 2016 and 2030. 6. Add a shock absorber to your portfolio Unexpected disruptions in commodity supplies caused by natural disasters or geopolitical upheavals have a silver lining for investors. They drive up commodity returns even as they weigh down stocks and bonds. 7. Invest in a newly liquid asset class In the past two decades, the commodities market, once the exclusive domain of producers and industrial consumers, has opened to investors. They can access commodities through private equity or passive index funds, and today they can invest in actively managed portfolios. 8. Tap into a different source of performance Commodities today have resumed their traditional role as a portfolio diversifier. The low correlation between commodities and fixed income has been stable, but after the global financial crisis, commodities and equities developed nearly the same pattern of return. Recently, their performance has diverged, making it more likely for commodities to perform when equities do not. 9. Layer on diversification The low correlations between commodity sectors take the benefits of asset class diversification to the next step. The direction of corn prices has little bearing on the direction of oil prices, for example. Such distinctions make room for active commodity management. Instead of treating commodities as a single undifferentiated asset class in the manner of commodity index funds, the active manager can seek out value among widely differing commodities sectors. 10. Cushion currency effects Commodities are priced in US dollars. When the dollar strengthens, it adds to the profits of commodity exporters as they convert them to local currency. Conversely, when the dollar weakens, commodity demand in the non-dollar world strengthens. 3 Important Information Published on 1 October 2018. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). 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