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Which commodities have done well for Viewpoint: Scott Smith

The CIO of the Calgary multi-family office on where we are in a commodities supercycle, which ones to focus on and where the risks are

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While certain commodity prices will rise due to underinvestment, supply-chain issues or other factors, others will not perform as well. But the overall role of commodities in a balanced portfolio is key for ultra-high-net-worth investors in the current supercycle, says Scott Smith, chief investment officer at Viewpoint Investment Partners in Calgary.

Viewpoint, which manages money for select families, grew out of the family wealth management vehicle of Mac Van Wielingen, a founder at ARC Resources Ltd. and ARC Financial Corp.

Here, Smith shares his views on where we are in a commodities supercycle, which ones have done well for the firm, and which he believes investors should pay particular attention to.

Which commodities are hot right now, and why?

“We’re bullish on copper and industrial metals in general.

Copper is really interesting because, although prices have risen this year, there is still underinvestment in the copper supply chain, along with some tightness of this commodity in the market. Copper is currently trading at around $10,000 a ton. Industry experts say it might need to rise to $12,000 or $15,000 a ton before mining companies make long-term investment commitments in new supply.

In spite of that tightness, several factors point to a long-term demand for copper.

The greening of the global economy and a transition to more renewables will require additional copper supply. A boom in artificial intelligence and increased usage of data centres will require both the maintenance of existing electrical grids, and a need for more electricity, which will also impact copper demand.

A growing middle class in India will continue to require industrial base metals, as that country builds out its industrial infrastructure. India will also be a big consumer of agricultural commodities.

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I am also bullish on precious metals, including gold and silver, as well as cryptocurrencies, in a macroeconomic environment where fiscal stimulus continues to be a major factor underpinning consumer demand.

Furthermore, inflation is likely to remain higher and stickier than it has been over the last 20 years. Investors will be looking for ways to hedge against higher than expected inflation. We are starting to see that with central banks, and even some retail investors, buying additional gold reserves.”

You believe we are in a “commodities supercycle.” Where are we in that cycle?

“We are in the early innings of a new commodities supercycle. This began after the COVID-19 pandemic in 2020 as governments were quick to implement record amounts of fiscal stimulus.

The upswing in commodity prices for supercycles takes anywhere from 10 to 15 years to completely play out. We are only three or four years into this cycle.

There will be pullbacks in commodity prices, but generally the trend will be up. One of the big drivers of that is the re-emergence of industrial policy in western countries in a geopolitical landscape that is moving away from globalization towards a desire for what we would call domestic reindustrialization.

When you think about the key lessons learned from COVID, one of those is that there were weaknesses in global supply chains. Making sure that supply chains are robust will lead to more near-shoring. With this fortifying of the supply chains, we are moving away from the disinflationary environment and focus on lower prices that globalization provided.

Deglobalization and domestic reindustrialization are both factors that bode well for the current commodities supercycle with respect to ongoing demand.”

Which commodities do you expect to do well throughout 2024, and why?

“I think industrial metals, and precious metals, are going to do well over the short term because of growing global demand, as I noted earlier.

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So too, will natural gas, as it is needed for the many grid challenges required for power generation. Electricity grids are currently operating at full capacity and longer lead times are required to add renewables and nuclear power in order to support an increased grid. Natural gas will, therefore, be required to meet this increased energy demand fastest.

While natural gas prices are relatively low right now, they are probably in something of a bottoming process, and so we are optimistic that an increased demand for power will boost those prices.”

Which commodities have performed well for your firm and investors over the past six months, and what sort of returns have they provided?

“Over the last six months we’ve seen really good performance in precious metals, as well as cryptocurrency like bitcoin.

Agricultural commodities like cocoa and coffee have also been doing well.

Supplies of coffee were forecasted to be relatively robust this year, although extreme weather events in Brazil and Vietnam have thrown that continued supply into question somewhat.

Arabica coffee is up 17 per cent year-to-date to the end of April.

I think one of the themes that we’re likely to see over this commodities supercycle is that, even for commodities for which there isn’t expected to be huge increases in demand, lower investment in supplies and supply chains will create volatility when extreme weather events or supply shocks occur.

Cocoa is a good example of this, with that commodity up about 150 per cent year-to-date, so cocoa has been a very strong performer.

But the backdrop to that is there have been roughly 20 years of underinvestment in both new tree plantings in Western Africa, as well as in the husbandry of existing trees. That underinvestment has occurred because cocoa prices, like many commodity prices, have languished. A lack of cash to take care of existing trees has made them a lot more susceptible to disease.

Layer on extreme weather and there have been three years where the cocoa yields and cocoa crops have been less than expected. This year stocks have finally started to run out, and along with the continuation of a supply deficit, traders have been scrambling to make sure they had enough cocoa beans to fill their contracts, resulting in a parabolic rise in prices.

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Base metals have also been strong performers this year. Copper is up about 17 per cent. Aluminum is up just under 10 per cent. On the precious metals side, gold is up just under 11 per cent this year, with silver up about 10 per cent.

Livestock is also doing very well, with live cattle up about 10 per cent, and lean hogs up just under 20 per cent this year.

Grains and natural gas have not enjoyed the same performance year-to-date, so a broadly diversified portfolio of commodities year-to-date would be around, or over, 5 per cent.”

Where do you see potential downsides for commodities, and why?

“The risk that we see to commodities in the short term is really on the possibility of a global recession. If the labour market weakens and we’ve got an economic downturn, that reduction in demand will be harmful for the overall prospects for commodities.

At this point, however, we feel that governments don’t have an impetus to remove fiscal stimulus, and pull back on deficits. But if we get wholesale changes in government across the globe where there is desire to apply more of a fiscal restraint, that could hinder demand.”

Where do commodities fit into the portfolio of an ultra-high-net-worth investor?

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“The research that we’ve done on this is that an allocation of anywhere between 10 and 20 per cent will help improve the robustness of an investor’s portfolio and also improve its risk and return characteristics.

While 20 per cent can be high for some people with respect to their investment risk profile, in times like this, where we have high macroeconomic uncertainty in addition to high inflationary uncertainty, we think the higher end of the 10 to 20 per cent range is closer to where you want to be in terms of your portfolio allocation.

Generally, commodities have a very low correlation to both equities and bonds, and this is a factor to consider in times of uncertainty, especially when investors are looking for truly uncorrelated investments.”

Responses have been lightly edited for clarity and length.

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