Commodities Set for Revival Amid Global Shifts
Commodities may be ready for a comeback after years of low performance. Key drivers such as deglobalization, the global shift to renewables, and rising energy demand from AI advancements could drive prices higher in near future.
Despite a strong performance in 2022 during the spike of inflation, the last 15 years have been unkind to commodities, which have significantly underperformed equities. More recently, since inflation was at its peak and began rolling over in mid-2022, the S&P GSCI index—an index for commodity prices— trailed the S&P 500 Price Index by an astonishing 68.4% (measured from 5/31/22 to 8/31/24). Consequently, as of 31 August, commodities are trading at very cheap levels. From 30 June 1988 to 31 August 2024, the S&P 500 cumulative price gain was around 1,965%, while the S&P GSCI recorded a modest gain of just 213%.
There are a few structural macroeconomic conditions that may suggest some tailwinds for commodity prices moving forward. First, deglobalization—evidenced by the increasing imposition of trade barriers, which was exacerbated by supply chain disruptions from the Covid-19 pandemic—signals a partial retreat from globalization. This is likely to contribute to upward inflationary pressures that could buoy commodity prices. Second, the decarbonization movement is facilitating a global transition toward renewable energy, necessitating the gradual phase-out of older, carbon-intensive fuels and fostering an environment conducive to commodity price appreciation amid anticipated tighter energy supplies. Third, the escalating demand for artificial intelligence applications requires substantial computational power, which is expected to drive energy consumption higher and, consequently, elevate energy prices.
Over the more tactical short term, we don’t necessarily think now is the time move into inflation protection assets. However, as investors look forward and re-visit their longer term investment policy statements, we think inflation will be structurally a bit higher than we saw in the 2010s. Therefore, it may be beneficial to allocate a bit more to inflation-protecting assets than investors did back then.