Commodities have become key contributors to CTAs’ exposures and returns. Since July, CTAs have greatly reweighted commodities from an overall -30% short of their net exposure to nearly +60% long today. Softs represent the lion’s share (+16%), followed by energy (+15%), base metals (+12%) and other minor segments (+12%). Precious metals are standing out at less than +3%. Overall, CTAs now show a 0.5 beta to commodity indices (vs. 0.1 in average). We review whether commodities will be a structural driver for CTAs and discuss the debated start of a new commodity “super-cycle”.
Commodities benefit from strong macro tailwinds. An early-cycle stage out of the pandemic recession and world reflation policies are strong supports. Global liquidity also surged, fueled by monetary stimulus, to be relayed by household and corporate savings waiting to be put back to work. Ample market liquidity, that is looking for allocation, will partly flow into commodities. Moreover, as rates and inflation pick up, investors will look for protection naturally found in commodities. With declining demand for safe-havens and a worsening U.S. external position, extra dollar weakness might help too.
Commodities are also enjoying fundamental tailwinds, albeit unevenly. They are facing a supply/demand deficit. It is resulting from years of supply tightening since the financial crisis and more recently due to the trade war and the pandemic, with limited capacity investments and exploration. Meanwhile, demand is about to surge as vaccination roll out. True, situations are uneven across commodities: the coming oil supply/demand deficit will be partially matched by spare capacities. Copper is facing shortage but not nickel and iron, while soft commodities are not structurally under supplied. Also, world trade saturation will likely give producers greater pricing power while transportation costs will rise. Pressures on trade could prove sticky, given Mr. Trump’s trade war legacy and tech and supply-chains pressures under Mr. Biden.
Finally, tailwinds from secular trends would also support demand and prices. A housing boom has started, especially in the U.S. Decarbonization and the rise of electric vehicles will fuel demand for some base metals. Prospects of surging infrastructure spending will be a boon for most cyclical commodities and construction materials.
We see several key risks to this bullish view. First, the world potential growth will probably decline, partly due to the normalization of Chinese growth. Second, better energy efficiency, with declining use of fossil energy, improved recycling, industrial digitization will dent in demand. Third, the transition toward a more tertiary economy could cap demand for capital goods. Last, failure to validate the ambitious infrastructure investments in the US could break the momentum. All in all, a decade-long new “super-cycle” remains to be seen, with key hurdles to overcome. However, at least a couple-of-years of early-cycle commodity “boom” seems likely. CTAs might be an appealing means to allocate to commodities.