Inflation Predictions Are Boosting Interest in This Asset Class
What You Need to Know
While 2010 to 2020 proved challenging for commodities, higher inflation in the 2020s could bolster performance.
Another reason for commodities optimism is the ongoing global transition towards a greener economy.
For long-term investors, commodities and equities can diversify each other well, especially across different market cycles.
Due to their sub-par performance during the 2010s, many advisors have turned away from commodities in favor of higher concentrations in U.S. and global equities. That playbook served many investors well, thanks to the incredible run that equities enjoyed during the decade.
But according to experts with the specialty exchange-traded fund provider USCF Investments and index developer SummerHaven Index Management, the outlook for the rest of the 2020s is much different.
In fact, as SummerHaven Index Management CEO Kurt Nelson argued during a recent webinar hosted by USCF Investments, there’s good reason to believe the inflationary pressures affecting the global economy could push commodities back into the spotlight in the years ahead. Another reason for commodities optimism, Nelson suggests, is the ongoing global transition towards a greener economy.
During the discussion, Nelson acknowledged that individual commodity categories are often viewed with hesitancy by investment professionals building portfolios for their clients, and perhaps rightly so.
However, investing in well-constructed and well-diversified commodities funds as part of a holistic investment strategy that also includes traditional equities and bonds can be a winning strategy, Nelson argues, especially from a risk-adjusted perspective.
In the end, Nelson says, advisors and investors should take some time in the present moment to reassess their perspective on the role of commodities, arguing that the 2020s are likelier to resemble the 2000s than they are to resemble the 2010s.
If that comes to pass, Nelson suggests, diversified commodities funds could deliver impressive results, even during a decade defined by inflationary pressures and weaker global economic growth.
Inflation’s Recent Past
As Nelson recalled during the webinar, during the 2010s, the U.S. and global markets enjoyed many subsequent years of steady, accommodative monetary policy, as well as significant fiscal policy support from governments across the globe.
Despite this, inflation continued to run well below the Federal Reserve’s 2% target, and there was more concern about reaching full employment than there was about the potential for inflation to spiral out of control. During the middle of the decade, in fact, investors were more worried about deflation than inflation.
“This was a decade in which we were all operating in this zero-rate environment, and we all got pretty used to very low, almost non-existent inflation,” Nelson explains. “Well, as we all know, things have changed pretty dramatically coming out of the COVID pandemic. Now, in 2023, rates are back to what we would historically consider a normal range, and inflation is still elevated.”
Nelson notes that inflation has moderated from the “incredible levels” seen in 2022, when the consumer price index approached 10%, but the current level in the realm of 3% remains higher than the Fed’s stated target.
“This has all been a pretty big shock for many portfolios,” Nelson says.
