Investors are getting into commodities while keeping an eye on recession risk

A trader works on the New York Stock Exchange (NYSE) in Manhattan, New York City
A trader works at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. March 7, 2022. REUTERS/Andrew Kelly

March 12, 2022

By David Randall

NEW YORK (Reuters) – Investors are rushing to recalibrate their portfolios for a potentially prolonged period of elevated commodity prices, as Russia’s invasion of Ukraine triggers stunning moves in commodities that threaten to exacerbate inflation and hurt growth.

Wild moves have been the norm in commodities in recent weeks as the war in Ukraine and subsequent sanctions on Russia helped push oil prices to 14-year highs and natural gas prices near records. Wheat and copper prices are near all-time highs, while a doubling in nickel prices earlier this week forced the London Metal Exchange to halt trading in the metal. [L2N2VE09Q][L2N2VE0JL]

With the US economy already feeling the stress of a broad post-COVID-19 demand surge and a quick resolution of the West’s standoff with Russia in doubt, some investors are betting that high commodity prices will persist for the foreseeable future.

Investors have invested $10.5 billion in commodity-related ETFs and mutual funds since the beginning of the year, including a $2.8 billion gain in the week ended March 2.

“This is a very unique environment that we are in because the system is affected by both demand shocks and supply shocks at the same time,” said Eric Marshall, portfolio manager at Hodges Capital.

Marshall believes demand for commodities is likely to remain strong even as geopolitical tensions ease, fueled by factors such as the production of electric car batteries, which require metals like copper and nickel. A $1 trillion US infrastructure bill passed in November is boosting demand for steel, cement and other commodities, he said.

He is increasing his stake in steelmaker Cleveland Cliffs Inc and agricultural companies Tyson Foods Inc and Archer Daniels Midland Co, while trimming positions in consumer staples companies that are likely to feel the brunt of higher gas and material costs.

Massive rallies in commodities have increased pressure on the Federal Reserve and other central banks to tighten monetary policy and fight inflation. This has fueled fears it could hurt economic growth as rising prices are already weighing on consumers.

Investors are broadly expecting the Fed to announce its first rate hike since 2018 at the end of next week’s monetary policy meeting and have priced in a 1.75 percentage point tightening this year. This week’s data showed consumer prices rose last month at their highest rate in 40 years. [L2N2VC2QK][FEDWATCH]

Matthew Schwab, portfolio manager of the Harbor Capital All-Weather Inflation Focus ETF, has increased exposure to oil and metals futures. Industrial metal prices are likely to remain elevated due to underproduction during the coronavirus pandemic, while oil companies appear content to trade lower production for higher prices, he said.

“You can see the signs of a commodity price rally in the lack of investment over the past decade,” Schwab said.

Mark Khalamayzer, senior manager of the Columbia Commodity Strategy Fund, has increased his exposure to oil and soft commodities to the maximum in his fund’s prospectus, betting that the conflict in Ukraine will lead to higher prices.

Brent crude was trading at $112.67 a barrel on Friday, up 44% year-to-date.

Even as investors try to align their portfolios with expectations of higher commodity prices, they are concerned about how the commodity rally could hurt growth.

The risk of a recession triggered by a sharp cut in consumer spending increases the longer oil prices remain high, said Robert Schein, chief investment officer, Blanke Schein Wealth Management.

“If oil stays well above $100 a barrel for a few months, the consumer and the economy can handle it, but if oil stays above $100 for more than six months, we will see an increase in recession risk,” he said.

(Reporting by David Randall; Editing by Ira Iosebashvili and Cynthia Osterman) Investors are getting into commodities while keeping an eye on recession risk


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