We are in unprecedented times. COVID-19 and the lockdown impact has led to one of the sharpest declines in global growth for many generations, combined with the fact that it has sped up various sector declines and perhaps irrevocably changed the way the world functions socially and in business. The central banks across the globe have entered into a process of loose monetary policy and QE on a scale and of a nature that does not have the same end point in fiscal austerity as we saw in the policies effected in 2008 during the financial crisis.
In 2020 and beyond we have a global macro backdrop that is markedly different to 2008, with all economies similarly impacted by COVID-19. In fact, the developing economies and their less developed health care systems are even less able to cope. The world is in a period of structural change and no country or central bank is able to do much other than print money and increase government borrowing.
However, given the structural shifts happening at a societal level the investments and areas that will see significant inflationary pressures over the coming decade need careful consideration. Office work is changed and the retail sector has accelerated its move from physical shopping streets to online virtual experiences – the traditional yields and capital appreciation seen from prime real estate are likely to be hard to find as corporates move to a remote work model and hot desks in a central hub and foot fall drops in major shopping destinations. The largest landowners in the world tend to be pension funds who, historically, have used high yields from real estate to offset low yields on their holdings of government debt.
Of course, there will be a period of readjustment in stock values. Technology and first movers in the new world will see high valuations and companies constrained by old world models will fall by the wayside. Over time, the policy of QE will likely see the stock market indices moving higher. But where does an investor find additional yield and return when some traditional investments are struggling and what sectors will see additional large-scale allocation into them for the coming decade?
Physical commodities (gold, oil, iron, copper and silver) have been traded in some cases for millennia. However, in the last 30 years or so a large number of derivative contracts have been created: the so called ‘financialization’ of the markets.
This means that investors have access to these natural inflation hedges. But the vast majority of those contracts are packaged for investors as passive tracking funds or ETFs. There are very few asset managers who offer access to dynamic alpha generative solutions as a stand-alone product. The multi strategy managers will have a few silos of commodities traders, but they are not separated from the wider fund and the investor merely gets access to the blended returns of the platform. Currently, there are only a few single-named funds or solutions for the UHNW and asset managers to access in commodities.
However, the world is changing, and commodities will likely see some significant allocation from pension funds and asset managers into this space as they seek inflation hedges. The need for a robust single point of access is now greater than ever with an experienced manager attuned to these markets and the talent pool that can extract the value from them.
As central banks shift to long-term inflation agendas and with low interest rates here to stay, commodities represent one of the few reliable inflation hedges. Certainly, when set against the societal changes, that will mean other traditional inflation hedges such as property experience their own, less certain, path through the next decade.
A well-positioned commodities platform can benefit from the overall theme of inflation. But, equally, selecting a handful of skilled managers in specific commodities can generate alpha from the world’s continued need for energy and technological innovation This is achieved both by understanding the key dynamics of their own markets and equally able to generate above expected returns from commodities and their application to new technology such as battery technology.
The world will always need the building blocks of its economies and yet currently there are so few sophisticated ways for investors to access these markets. As investors seek to find means of hedging their inflation, many hundreds of billions of US dollars will seek a home in financial commodity contracts. The time has never been better for a commodities asset management platform and to the first mover go the spoils.
