What's Been Driving Commodities?
Summary
- Commodity indexes are rallying as government stimulus and low interest rates fuel inflation expectations.
- Commodities can help investors hedge against inflation and diversify portfolios.
- Commodity exchange traded products (ETPs) offer convenient and affordable access to broad baskets of commodities.
By Gargi Pal Chaudhuri
Expectations for rising inflation in a strengthening, post-COVID economy have helped lift commodity prices in 2021, and recent moves highlight how commodities can offer diversification as markets price in potential risks of stimulus-fueled growth.
Commodities, as represented by the S&P GSCI - a benchmark of 24 commodities in agriculture, energy and metals - is the top-performing asset class through the middle of March, up 15% through March 26, outpacing all other asset classes.1 It's a sharp turnabout from 2020 when commodities lagged behind stocks and bonds.
Commodities and inflationary forces
Commodity price gains in part appear to reflect the growing demand for raw materials such as copper for use on the factory floor and to build renewable energy infrastructure, and we expect that trend to continue.2 This follows severe pandemic-related disruptions in the global supply chain which accelerated a shift to localized production, limiting supply and pressuring raw material exports. With inventories remaining tight and commodity capacity constrained, copper, aluminum, palladium, corn all recently traded at multi-year highs, and oil prices have recovered to pre-COVID levels.3
Extraordinary fiscal action from policymakers will aid the economic recovery in the near term but is raising questions about the potential for longer-term inflationary pressure. The discretionary fiscal response so far from global policymakers in response to the pandemic is about four times larger than after the global financial crisis, according to the BlackRock Investment Institute.
Rising commodities indexes may be a reflection of increased inflation expectations
Bloomberg, as of 3/26/2021. Index performance is for illustrative purposes only. The green line represents the S&P GSCI Total Return Index, an index composed of a diversified group of commodities futures including energy, industrial and precious metals, agricultural, and livestock. The US 10-year breakeven rate measures the difference between the 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The breakeven rate serves as an indication of the markets' inflation expectations over the 10-year horizon. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Consider exposures to baskets of commodities to help hedge against inflation
Previously, investors thought of gold when looking to protect against price surges because gold has historically demonstrated moderate sensitivity to changes in inflation. Recently, the relationship between gold prices and inflation has been less pronounced than in cyclical commodities such as energy, which is more directly tied to consumer and manufacturing activity. Gold has tended to underperform in periods of rising real interest rates because owning physical gold doesn't generate income in the form of interest or coupons.
We believe investing in exposures to baskets of commodities can help to hedge against inflation since they are inputs in inflation gauges including the consumer price index. For example, energy comprised about 6%4 of inflation as measured by the Consumer Price Index for All Urban Consumers and impacts the costs of many goods and services in the economy. Historically, commodities have exhibited relatively low correlation to equities and bonds over time, adding diversification to multi-asset portfolios.5 Moreover, commodities sectors typically have a low correlation or negative correlation to each other, for instance, precious metals and livestock are two commodities sectors that are historically negatively correlated.
ETPs for access to commodity indexes
Investors are increasingly using commodities in their portfolios for diversification of returns and to help mitigate other risks in their portfolios. Demand for broad, diversified commodities ETPs that give investors access to commodity exposures across energy, metals, agriculture and livestock sectors vs. single commodity exposures such as gold or oil, has jumped in 2021, bringing in $6.7 billion globally.6
Global Commodity ETP AUM (US$ BN)
Source: BlackRock, as of 3/24/2021. Data includes global commodity ETP AUM across broad and single commodity ETPs. Subject to change.
ETPs offer convenient, affordable access to broad commodities investment strategies and can help investors align their portfolios with their views on inflation and economic growth.
___________
© 2021 BlackRock, Inc. All rights reserved.
1 Bloomberg (as of March 26, 2021).
2 Demand from renewable power generation, battery storage, electric vehicles, charging stations and related grid infrastructure accounts for about a fifth of copper consumption, according to Citigroup Global Markets Inc.
3 Bloomberg (as of March 26, 2021).
4 U.S. Bureau of Labor Statistics (as of February 2021).
5 BlackRock analysis of Bloomberg data (as of March 26, 2021); the S&P GSCI Index's correlation with the S&P 500 is 0.39 over the past 20 years, and -0.09 with the Bloomberg Barclays US Aggregate Bond Index. Correlation of 1 means uniform price moves, while -1 means perfect opposition. Zero correlation means no relationship.
6 BlackRock (as of March 24, 2021).
_________
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.
Investing in commodity-linked derivatives and commodity-related companies may increase volatility. Price movements are outside of the Fund’s control and may be influenced by weather and climate conditions, livestock disease, war, terrorism, political conflicts and economic events, interest rates, currency and exchange rates, government regulation and taxation. Commodity futures trading may be illiquid. In addition, suspensions or disruptions of market trading in the commodities markets and related futures markets may adversely affect the value of the Fund.
Commodities' prices may be highly volatile. Prices may be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the prices of commodities.
Diversification and asset allocation may not protect against market risk or loss of principal.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.
The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial professionals for more information regarding their specific tax situations.
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg, BlackRock Index Services, LLC, Cohen & Steers, European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), ICE Data Indices, LLC, NSE Indices Ltd, JPMorgan, JPX Group, London Stock Exchange Group (“LSEG”), MSCI Inc., Markit Indices Limited, Morningstar, Inc., Nasdaq, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), Nikkei, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.
Neither FTSE, LSEG, nor NAREIT makes any warranty regarding the FTSE Nareit Equity REITS Index, FTSE Nareit All Residential Capped Index or FTSE Nareit All Mortgage Capped Index. Neither FTSE, EPRA, LSEG, nor NAREIT makes any warranty regarding the FTSE EPRA Nareit Developed ex-U.S. Index or FTSE EPRA Nareit Global REITs Index. “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").
© 2021 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.
This post originally appeared on the iShares Market Insights.
This article was written by
Recommended For You
Comments (5)
