The commodities supercycle… supported by the inflation outlook –

Well, the third most important asset class, and one that is sometimes overlooked, is one that needs to be included in a properly diversified portfolio and to the right extent of the investor’s profile. Since the depths of the pandemic, these questions have shown an upward trajectory that is difficult to ignore. The reasons are several, between the disruptions of production chains, the demand of industrialized countries to jump on the train of economic recovery, the large volumes of purchases that China has made in certain materials, even current inflationary pressures, it all adds up.

There is a strong dynamic for all, both for metals, oil and agriculture, as we mentioned in the note “Inflationary pressures portend tensions on commodity markets”, or most recent “Gold is not and neither is silver …” The elasticity of demand for certain materials is strongly linked to economic changes. If conditions continue to point to “normal” demand will continue to rise, as will prices. Demand is soaring due to the strong recovery supported by extensive stimulus programs, to such an extent that freighters are competing for space, as the Baltic Dry index shows, at their highest since 2010:

Investing in agriculture may seem like a good strategic decision. After all, whether the global economy is in a recession or booming, people still need to eat. For this reason, investments in agriculture and ranching are considered by many investors to be recession-proof. In addition, the world’s population is growing and agriculture will play an increasingly important role in sustaining global societies.

Moreover, as Cobas points out, from a fundamental point of view, the decade of low commodity prices reflects lack of investment in capacity on the part of producers, who limit supply. Given the improving demand outlook, it is time to replenish the stocks of commodities that have necessarily been allowed to decline, but it is not that easy, as the supply does not adapt quickly. to the needs of demand because it takes years of investment, extraction or drilling to achieve the increase necessary to reduce supply deficits.

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All eyes are on the oil and gas companies, says Scope’s Marlen Shokhitbayev. Its transition to greener energy production weighs on its future. Indeed, the recent events of certain shareholders’ meetings, such as ExxonMobil or Chevron, “will lead to faster and deeper transformations in their operations”. However, as they adjust their business, they are helped by the rebound in oil and gas prices. In fact, “if oil and gas prices stay above $ 60 / bbl, we will see strong free cash flow generation even after dividends, exceeding 2019 levels, when Brent was on average. $ 64 / barrel ”,

Cobas AM focuses on copper, liquefied natural gas and petroleum

the copper It is not only at the origin of the energy transformation since electric vehicles need 4 to 5 times more copper than traditional thermal vehicles, but it is also present in the construction industry which is today one of the main copper consumers (wiring, water and gas pipes, thermal systems, etc.). Any fiscal stimulus through infrastructure programs that governments implement will increase demand, so it is predictable that demand for this metal will more than double by 2050. To date, there is few new large copper mines coming into production over the next few decades that can absorb this increase in demand.

In regards to liquefied natural gas, the Spanish value manager considers that being seen as a kind of transitional energy towards renewable energies offers investment opportunities. Demand from Asia has been growing at a rate of 9% compound per year since 2015 and its growth over the current decade is estimated to be around 4% compound per year. The bulk of our investment is focused on infrastructure assets and long-term contracts, which give us some visibility on future cash flows and which we believe should, despite the fact that their behavior at this time. day did not demonstrate it, behave accordingly. a more defensive way given the nature of the business.

And finally in the Oil Cobas’ investment is based not so much on its price as on Capex. Knowing that the demand for oil is not discretionary and is relatively inelastic, oil being an absolutely necessary good for the daily life of our society. Cobas comments that they are not investing in oil as a commodity, but through service companies and beneficiaries of the necessary investments in the Capex necessary for its extraction as demand returns to pre-market levels. pandemic, which will result in insufficient supply to meet a certain level of demand, prices will rise and generate incentives to reinvest in the sector.

To this vision of Cobas add UBS that in one of his last notes he comments that the cyclical recovery will see commodity prices benefit from an environment of new highs in purchasing indices for the manufacturing sector in the United States, the euro zone, the United Kingdom, Australia and Japan, which point to rates growth in activity faster than in China.

For its part, Loyalty is a little more careful and comments that the relative good behavior that all commodities have recently shown, from copper to corn, will undergo changes and we will probably see more dispersion of returns from now on, and shows a graph with the price movement of various commodities and the different directions they are taking despite strong gains overall. underlines that theDemand for metals and agricultural products is expected to decelerate due to moderating growth rate in China and the end of the global restocking cycle, But We’ll see:

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Aldrich Stanley

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