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Improving Fundamentals Boost Case For Commodities

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Neuberger Berman

By Hakan Kaya

Commodity markets are once again attracting investors.

Unlike recent years, the asset class today is supported by improved fundamentals, as demand growth across the commodity complex is strong and supply is generally short and fragile. Improved performance in 2017 - along with fears of higher inflation and thus a weaker U.S. dollar - drove solid net inflows into commodities, a trend that we believe can continue given the value and diversification potential commodities offer relative to overvalued and recently lower-yielding traditional assets such as stocks and bonds. As you can see in Figure 1, the ratio of the price of the S&P GSCI versus that of the S&P 500 remains well below its long-term median, which combined with encouraging fundamentals could represent an attractive entry point for commodities.

In this short paper, we analyze the recent alignment of demand and supply that explain the re-emergence of commodities as a key component in diversified portfolios from a return, risk and inflation-hedging perspective.

Figure 1. Commodities Look Attractive at Current Levels

S&P GSCI versus the S&P 500 Index

Source: Bloomberg.

Synchronized Global Growth Drives an Acceleration in Commodity Demand…

Commodity demand and global economic growth generally go hand in hand. As output gaps close globally and economies start to operate over capacity, we tend to see excess demand for commodities, boosting their performance, as shown in Figure 2. Recent economic data appear to support this observation, and we are seeing expansion in nearly all the world's economies (see Figure 3) and healthy PMIs in all key import and export regions for the first time since 2014. Given the broad connectivity of the global economy, this synchronized emergence of the late stage of the business cycle should be a tailwind for commodities, one we have not experienced for more than a decade. It is often in this phase of the business cycle

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Neuberger Berman, founded in 1939, is a private, independent, employee-owned investment manager. The firm manages a range of strategies—including equity, fixed income, quantitative and multi-asset class, private equity and hedge funds—on behalf of institutions, advisors and individual investors globally. With offices in 23 countries, Neuberger Berman’s team is more than 2,100 professionals. For five consecutive years, the company has been named first or second in Pensions & Investments Best Places to Work in Money Management survey (among those with 1,000 employees or more). Tenured, stable and long-term in focus, the firm has built a diverse team of individuals united in their commitment to delivering compelling investment results for our clients over the long term. That commitment includes active consideration of environmental, social and governance factors. The firm manages $323 billion in client assets as of March 31, 2019. For more information, please visit our website at www.nb.com.For important disclosures: https://www.nb.com/disclosure-global-communications  Contact Us: Advisor Solutions (877) 628-2583 advisor@nb.com RIA & Family Office (888) 556-9030 riadesk@nb.com

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