Company / Analytics

Analytics, 08 April 2022

Is a commodities rally coming?

Analysts from banking conglomerate JP Morgan Chase announced that the commodities could surge by 40% if investors boosted their allocation to raw materials due to rising inflation.

As Russia’s invasion shook global markets, commodities soared to record highs, boosting the prices of everything from wheat to oil. The resulting uprise in global inflation stirred a stricter response from central banks, including the Federal Reserve and the bank of England. Investors have weighed reshuffling assets in their portfolios between stocks, bonds and raw materials. Though current commodity allocations appear to be above historical averages, analysts believe they are not very overweight, suggesting the scope for gains in raw materials.

The analysts further noted that given the high need for hedges on inflation, it is conceivable to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous high. This would imply another 30% to 40% upside for commodities in the future.

Commodities outlook

This year, global commodities have rallied across the board, with notable gains in energy, metals, and crops. The top gainer has been Brent crude – the global oil benchmark – which has surged more than 30%, hitting the highest level since 2008.

Analysts, including leading bank Goldman Sachs Group, have been consistently bullish on raw materials, partly on their role as an inflation hedge. On April 7, Goldman warned in a note that a global copper shock was underway.

In addition to oil, essential metals have also rallied amid surging demand in the energy sector and concerns that supply from Russia – a major supplier – of some minerals - could be disrupted due to coordinated western sanctions imposed on Moscow following Russia’s invasion of Ukraine.

For instance, lithium prices, a significant component of EV batteries, have nearly doubled this year as commodity prices soared. This would further raise the price of EV cars and other equipment.

Now JP Morgan Chase believes commodities could rise by up to 40% this year if investors increase their holdings in raw materials to hedge inflation. The analysts forecast that investors may distribute more than 1% of their total financial assets globally to commodities to hedge against inflation, resulting in a 30 to 40% upside.

The analysts believe the prospects are even better for oil, given the continuing supply challenge in the sector. Except for Saudi Arabia and the UAE, every oil producer produces less today than they were in 2020. Coupled with the supply shock from Russia, the constraints have become more severe than ever since the 1970s.

Furthermore, the record release from the U.S. Strategic Petroleum Reserve (SPR) remains insufficient to resolve the scale of the present supply shortage.

Bottomline

Commodities are thus likely to outperform this year as investors resort to them to hedge inflation. Ongoing supply chain challenges, geopolitics, and recovering demand following Covid and government policy have contributed to tightening markets this year, propelling commodities higher.

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