With the start of the war between Russia and Ukraine, the economic outlook as well as the forecasts for the year have changed. In this 2022, where we already had the highest levels of inflation in 40 years, we are now starting facing the consequences of this attack on democracy in European territory, and it is normal the markets have already suffered from it. During periods of uncertainty commodities are a refuge for investors, and we can also mention the dependency of the European countries on gas and oil from Russia. With all this in mind, we wanted to look at the evolution os the costs of oil, gas and metals since 2020 until now, as well as the Commodities funds that had a better start of the year.
Evolution of the costs of oil from 2020 to 2022
Evolution costs of gas from 2020 to 2022
Evolution costs of metals from 2020 to 2022
Which commodities funds had a better start of the year?
We have analysed the data from Morningstar and took the funds with better YTD returns in Euros on the 1st of March* We have also received the insights from Schroders, Allianz GI, Credit Suisse and Vontobel.
*Vontobel and Credit Suisse date of 21/03/2022
Schroder International Selection Fund Commodity
James Luke, Fund Manager Schroder ISF Commodity
The war between Russia and Ukraine has changed the economic outlook for 2022. In this regard, the main focus will be on the commodities market, as Russia has a strong influence in this sector. In any case, we have long believed that, due to the energy transition, demand for metals would accelerate in the coming years, as the shift to electric vehicles and greater adoption of renewables is driven.
It is also likely that demand for agricultural commodities, such as corn, soybeans and pork, will increase, driven largely by China.
Supply chain disruptions have also led several countries to launch long-term plans to build strategic food reserves, particularly for wheat, to reduce their dependence on imports. This reflects the fact that raw materials remain a necessity, and are often essential for the global economy to function.
The Schroder ISF Commodity fund offers a way to this investment opportunity. It aims to provide capital growth in excess of the Bloomberg Commodity Total return index over three to five years by investing in commodity-focused stocks globally. These companies are selected through a disciplined investment approach, which seeks to take advantage of opportunities in the energy, agriculture or metals sectors
Allianz Global Investors Fund – Allianz Dynamic Commodities
Frederik Fischer Fund Manager, Allianz Dynamic Commodities
The Allianz Dynamic Commodities fund has had an excellent start into 2022. Our fund concept is well equipped to cope with this dynamic environment. The investment process is based on a quantamental approach, which combines a fundamental assessment of our expert group with quantitative signals e.g., on momentum, curve-structure, inventories or positionings. This expert group also advises the global multi asset platform with respect to commodity investments and consists of bottom-up equity analysts, economists and quantitative specialist.
From a top-down perspective, we are in an ideal environment for commodity investments, when looking at historic commodity bull markets. The global economy shows robust economic growth with elevated inflation and most commodity future curves are in a backwardation structure i.e., you earn positive roll yields.
The global pandemic will likely become endemic and Covid related restrictions will be lifted. Oil demand will recover quickly to pre-Covid levels, as e.g., flight activity will recover. Fewer supply chain disruptions will drive industrial metals demand higher. However, beside this cyclical demand recovery there is a change in structural demand patterns ahead of us. The world has agreed on very ambitious targets to cut global emissions and decarbonize the global economy. To achieve these targets a synchronous shift into renewables and EVs will create massive demand for critical metals like copper. Additionally, a switch from coal to natural gas is necessary.
But on the supply side the capex of energy and mining companies has been falling since 2012. Investors require high capital discipline especially from energy companies. Inventory levels for both industrial metals and energy commodities are already at multi-year lows. OPEC+ will still increase production limits, but many countries are already struggling to reach their quotas. The supply remains scarce.
A very hawkish central bank policy could mean some headwinds. However, even though the Fed will increase interest rates, we expect real yields to remain in negative territory driven by stubbornly high inflation. This should support gold.
On top of this favorable outlook geopolitical tensions might be an additional tailwind, as Russia is one of the largest commodity exporters.
Vontobel Fund – Commodity HN
Michel Salden, Fund manager, Vontobel Fund Commodity HN
Commodities, as in 2021, remain a strong diversifier against inflation and geopolitical risks. Indeed, commodities are the only asset class to have posted positive returns so far this year.
Recent geopolitical events only heighten fears that the inflation rally will be sustained in the coming months. Previously, prices had already soared, mainly due to energy shortages.
In early February, the Organisation of Petroleum Exporting Countries did not heed calls from the EU and the US to increase production, but stuck to its current path of monthly production increases of 0.4 million barrels per day. As inventories continue to fall, the current Brent yield is up to +10% y/y, indicating that buyers are paying a significant premium to secure immediate delivery.
There is no spare production capacity and demand is not responding to higher price levels. To combat these long-term inflationary pressures, the EU has decided to qualify nuclear power and gas as essential and environmentally friendly products (as we always hope).
The situation in Asia is totally different, with both Indonesia and China increasing domestic coal production and banning exports to other coal consumers. This keeps regional inflation under control. As the ECB and the US Federal Reserve start to tighten, the Chinese central bank looks set to start stimulating the economy to boost production and investment. This will be another pro-cyclical driver for metals and energy commodities traded in Asia.
In this environment, mutual funds investing in commodities are proving to be a good tool for investors. Our Vontobel Fund – Commodity HN strategy aims to achieve capital growth while respecting risk diversification.
The fund invests indirectly in global commodity markets, including gas, gasoline, industrial metals and prices, as well as grains. This diversified basket of commodity investments seeks returns from commodity spot price movements as well as active trading in commodity futures contracts.
The investment team, comprising experienced commodity specialists, follows a rigorous process. Based on a combined fundamental and quantitative analysis, the team dynamically selects the most promising opportunities within the investment universe and takes active positions in commodity futures curves.
Credit Suisse (Lux) CommodityAllocation Fund
Christopher Schütz, Fund Manager, Credit Suisse Asset Management
The Credit Suisse (Lux) CommodityAllocation Fund has had a good start to 2022 and continued last year’s upward trend. As of mid-February, all segments are posting significant gains. Only precious metals are lagging a little behind. Energy volatility remains high as geopolitical tensions inject uncertainty into oil and gas markets. The Credit Suisse (Lux) CommodityAllocation Fund seeks to provide exposure to a broad commodity complex incorporating Credit Suisse’s view.
Credit Suisse’s investment committee meets regularly and assesses the current market environment. Active sector or single commodity views are taken against the Bloomberg Commodity Total Return Index. Another source of alpha comes from positioning along the futures curve to optimise the cost of futures rollover. Our current tactical views favour the oil sector over precious metals.
Going forward, commodities can serve as a hedge against unexpected inflation, which remains a concern for portfolios with a concentration in long duration assets. Commodity baskets are cyclical and tend to perform well when economic growth is high, even during the late stages of economic cycles. Unlike equities, commodity exposure should also work in stagflation situations (which is not our baseline scenario), as commodities themselves are currently a cause of inflation due to shortages in physical markets and lack of investment in capacity. In the context of inflation hedging, a fully diversified investment (including energy, metals and agriculture) generally performs better than individual exposure, especially to gold, which can be vulnerable in the early stages of monetary policy tightening.
