10 months ago • 2 mins
Last year was no walk in the park in the markets, but as an asset class, commodities at least managed to stay on their feet. That might not be the case this year if the global economy strolls along the current path toward a recession, as many fear. Typically, a recession is bad news for commodities: the slowdown in economic activity erodes demand and causes their prices to tumble.
But what if the recession doesn’t happen? With the US posting stronger-than-expected economic growth for the end of last year, and China dropping its Covid restrictions and finally reopening, some of the bulge-bracket (i.e. major) investment banks are beginning to say there’s a lot of upside to commodity demand – and prices.
China’s been the world’s biggest consumer of commodities for at least a decade. As the chart above shows, last year China was responsible for at least 10% and as much as 70% of the world’s demand for things like gas, oil, copper, and lithium. And that was during a time of strict Covid lookdowns. Now, as travel restrictions are lifted and the Chinese economy recovers, commodity demand could see a big boost. What’s more, the Chinese government’s easing of property restrictions suggests steady demand from its housing and construction sector, stoking demand for copper, iron, and aluminum. Beyond China, there’s another wind blowing in commodities’ favor: the weaker greenback is making commodities (which are priced in US dollars the world over) more affordable for foreign buyers, which usually results in higher demand and ultimately higher prices.
This explains Goldman Sachs’s bullish view on the commodities complex, which they believe allows investors a better way to profit from China’s reopening – at least compared to stock markets, which have potentially priced in up to 80% of the reopening.
So yes, while a recession is historically bad for commodities, the asset class could still have a special place in your portfolio. Don’t forget: commodities can also provide an important inflationary hedge against any fresh pressures from China’s reopening. To gain exposure, you could invest in ETFs that track specific commodity indexes like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (ticker: PDBC; expense ratio: 0.62%) or the iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT; 0.48%).
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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