BNY Mellon IM: Commodities 'super cycle' comment

BNY Mellon IM: Commodities 'super cycle' comment

Commodities
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By Catherine Doyle, Investment Strategist for the BNY Mellon Global Real Return Fund.

We would avoid using the term ‘super cycle’ which doesn’t capture the more nuanced picture of the drivers influencing the prices of individual commodities which may themselves follow different cycles. Indeed, in areas such as iron ore, more robust demand is likely to be met in time with stronger supply.

However, common ground can be found across a range of commodities. Many commodities such as copper, lithium and cobalt are used as inputs for electric vehicles and, given the ‘greening’ of the economy and the earmarking of infrastructure spend for environmentally-friendly projects, there is likely to be increased demand on a sustained basis. Coupled with pent-up demand from the consumer and increased business activity as economies recover from their pandemic-induced lockdowns, this should provide upward impetus for commodities more broadly. The recovery is likely to be more commodity-intensive than during the pre-Covid period which was more skewed towards areas such as technology. The addition of fiscal stimulus to the mix means that both governments and corporates are channelling investment to fuel economic activity.

We currently have a small position in copper within the return-seeking core of the portfolio. With innovation more reliant on 5G technology and copper being an essential component of electric vehicles, its inclusion fits our view of a robust cyclical recovery against an accommodative policy backdrop.

Gold plays a somewhat different role in the portfolio and sits within the stabilising layer. After peaking above $2000 in August 2020, it is at a more delicate juncture due to rising real yields and a more reflationary tone in markets. This was behind our decision to reduce our exposure to the precious metal. Should longer-term inflationary pressures emerge owing to a combination of input-price appreciation, a build-up of capacity constraints within industries and true wage growth, this could pave the way for gold to deliver a creditable performance.”