the actions global have undergone a sharp correction over the past 15 months from matter prime. This could be the prelude to a new commodity super cycle in the next decade. That’s why the investors they need to carefully evaluate asset allocation and manage a well-balanced commodity exposure. It’s easy to be conditioned by the chaos of the war in Ukraine, quarterly reports and price movements, but a broader look can indicate that stocks could take a hit from inflation and commodities over the next few years. To analyze the issue is a report by BG SAXO.
The stock retracement, the commodity super cycle
In recent days the stock market had recovered thanks to the optimism with which we looked at the negotiations in Istanbul for the achievement of peace between Ukraine and Russia. Against this backdrop, stocks accelerated as the commodity market initially retraced but oil and natural gas almost immediately sent the clear signal that there is no breakthrough. In the peace talks there has not been the long-awaited turning point: Putin is unable to close an agreement that is satisfactory for him to allow him to obtain a victory or to conquer his population.
As a result, European equities have again lost ground and the cost of raw materials is starting to rise again. In this regard, Germany announced on Wednesday 30 March that it will enter crisis mode for natural gas supplies following Russia’s request to be paid in rubles, a decision the EU deems inadmissible. If Russia steps up to cut gas supplies to Europe, Germany should be the first to stop heating and some industrial processing. Berlin is trying to reduce dependence on Russian gas in various ways: a new partnership with Qatar, massive LNG investments in Tanzania and an agreement with E.ON to obtain enough green hydrogen to cover a third of current gas needs. natural.
Although green hydrogen is expensive, it has become a viable route for national security reasons as well as for the skyrocketing prices of natural gas in Europe.
Orphan commodity stocks: a risky game
Investors often get trapped by short-term sentiment, forgetting the big picture. Even before the war in Ukraine, the world was faced with an energy emergency created by the growing demand caused by the exit from the pandemic. As they began to catch up on years of underinvestment in energy and metals, the war in Ukraine has amplified the tension on raw materials. The final weeks of the stock rally and their response to the potential end of the war do not necessarily correspond to reality.
Equities, globally, have been down for the past 15 months when compared to the trend in commodities. And, in February, equities underperformed by 24% against commodities. This is the largest relative repricing of stocks since 2008. But more importantly, if we look at stocks versus commodities in the bigger picture since 1969, we can say that we have had two periods since then where stocks have dramatically underperformed. with respect to raw materials: the 70s and the 2000s. Periods during which they were registered, what we can call, the previous two commodity supercycles.
The epic outperformance of equities versus commodities from 2009 to 2020 was a historical period in which the world‘s major profit engines were activated even with little input from the commodities sector. The creation of excess wealth has “starved” the world for investment in the physical world, preparing the economy for a massive supply constraint shock.
For this it can be said that in the next ten years we could find ourselves in the next super cycle of commodities and the underperformance of stocks compared to the physical world. Equities may lose appeal or travel slightly higher as in the 1970s, but relative to inflation and / or commodities, they will tend to underperform. Investors who have focused on 100% equity portfolios in the last 12 years should, therefore, now think about diversifying their wallet on commodities and consider a different asset allocation.
The main issues that still guide the current scenario are still logistics, information security, the raw materials sector, defense and green transformation. At the macro level, inflation-linked bonds and commodities will outperform nominal bonds and equities.