Commodities, Real Assets and the Return of the Physical Economy

What You Need to Know

The Iran war and energy shock have catapulted commodities up the list of investor priorities. While the market is (at the time of writing) pricing this as short-lived, the change in geopolitical order makes this kind of supply disruption more likely, not necessarily just for oil. Meanwhile, the demands of AI have led to a return of the tangible economy. 

The changed role and priorities of the US, the loss of trust in the country and its decision to move away from its post-war role of imposing an order that enabled globalized trade, all make the question of resilience a recurring preoccupation—for portfolio managers as much as for countries. 

In addition to the proximate geopolitical nudge, commodities are part of a needed strategic tilt to real assets, distinct from our positive view on gold. Indeed, we would claim that geopolitics plus government debt levels make gold more akin to money than a commodity. In this paper, our focus is other commodities, industrial metals in particular. 

Commodities fill a gap in portfolio design and constitute a thematic trade linked to AI, deglobalization/geopolitics and growing resource nationalism. Commodity indices have large energy weightings. That is valid today, but we are less sure strategically, even if we think the energy transition will take much longer than people expect. We discuss the implementation for this via commodities directly, the mining sector or regionally via Latin America. 

The last 30 years has seen the build-up of complex global supply chains. As these continue to unravel, the implication, in aggregate, is that both the level and volatility of inflation will increase. 

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