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August 08, 2018 at 04:53 PM
Higher inflation and a teetering stock market should spur advisors to think about diversifying client portfolios by adding commodities, investment experts urged this week. These economic factors, a potential bottom in the commodities price cycle, as well as the move of institutional investors into this sector, also are signs that portfolios should be adjusted to include this asset class.
“Commodities have been on a positive track since 2016, but people are frustrated in 2018 because the broad [commodity] benchmarks are stalled,” said Tim Pickering, founder, president and CIO of Auspice Capital, a Calgary, Canada-based investment firm, during a webinar held by Direxion discussing trade wars and commodities. “In fact the Bloomberg Commodity Index is down on the year, but all [commodity] sectors are not. There’s diversity in commodity sectors, and there are opportunities if you’re tactical.”
Pickering also noted that there is strong demand in agriculture and metals, “but due to political wrangling and tariffs that have been proposed … it has affected [base] metals and grains specifically [in the short term],” he said.
Indeed, the Purdue University/CME Group Ag Economy Barometer declined 26 points in July, falling to 117, making it the largest one-month decline in producer sentiment since data collection began in October 2015, according to the CME Group. This drop was predicated by the trade wars, according to James Mintert, the barometer’s principal investigator and director of Purdue’s Center for Commercial Agriculture.
“This summer we’ve seen tariffs placed on imports of U.S. ag products by China and Mexico that are impacting producers’ bottom line,” Mintert said in a statement. In fact, in a poll the Center took of producers on net income effects as a result of the trade war, more than two-thirds of producers indicated a loss of income due to the trade conflicts, and 70% of them expected a net income decline of 10% or more.
Mintert added that there was “real concern among producers that [agricultural prices] will remain low and, possibly fall even further.”
What’s the upside?
But these lows as well as a culmination of factors may be the reason investors should look at commodities — in a tactical way, Pickering said.
He points out that there is “huge global demand with protein meats. Soybeans [have been] hurt with tariffs, but wheat [prices] have gone [up].” He adds that although a sector as a whole might be down, there are specific commodities, such as wheat in grains, or cotton in softs, that are having up years. Crude oil prices also keep climbing, with the WTI futures contract close to $70 per barrel.
Pickering and his co-presenter, Edward Egilinsky, managing director and head of alternative investments for Direxion, both said demand in many commodities is exceeding supply, and should continue, especially with rising population growth in developing countries, and because it looks like the economic cycle of commodities is close to a low.
