Inflation strategy: Conditions look ripe for a new commodities supercycle |

● Believers in a new commodities supercycle of rising prices are focused on three ‘R’s – rebound, reflation, and its ugly twin, repression

● Policymakers may be tempted to reduce the debt burden by allowing inflation to creep up

This is not prejudice or an unwillingness to embrace new ideas. The ‘other’ component of non-traditional asset classes in the Willis Towers Watson Global Pension Asset Survey almost doubled from 13% to 23% between 2004 and 2020. But while illiquid investments ranging from infrastructure to farmland have become fashionable, the rationale for buying liquid commodity futures has largely not stood up to scrutiny. 

As Jeroen Blokland, head of the multi-asset team at Dutch fund manager Robeco with €246bn in assets, explains: “We look at adding commodities to portfolios from an optimisation and diversification perspective. Since 2008 and in our most recent calculations, the correlation with equities is high, currently around 74%, using the Bloomberg Commodity index [BCOM], and the long-run expected returns are lower.” 

However, there is a growing belief that the investment climate is set to change. Blokland began buying into commodities last summer, although he stresses that this was a tactical decision. 

Other fund managers are even more bullish. A a transition point has been reached, says Trevor Greetham who runs segregated multi-asset mandates and part of the Governed Range of pension funds – about a third of total assets of £148bn (€173bn) – at Royal London Asset Management. 

He says: “I look at the long term. That suggests the period post-GFC is the exception. Broadly, until then, commodities offered a risk premium on a par with equities. If that is the case and if correlations revert to something like historical levels, you can assume almost any risk premium over cash to get to quite high allocations to commodities. Our strategic mix is 5% but we can, and do, add to it tactically.” 

Although ‘this time is different’ may be the most dangerously abused four words in investing, ‘this time it rhymes’, has a more soothing tone. The monetary and fiscal policy response to the Covid-19 pandemic is unprecedented in scale, but it is classically Keynesian in design. Believers in a new commodities supercycle of rising prices for a prolonged period are focused on three ‘R’s: rebound, reflation, and its ugly twin, repression. 

Two types of inflation 
The COVID-19 virus first appeared in China. Since the second quarter of 2020 the Asian economic giant has enjoyed a remarkable rebound. It is the only large economy to record positive economic growth over the year and analysts expect to see an 8% jump in GDP this year. That has been good news for commodity prices; the S&P GSCI index rose 87% from its low in April 2020 to mid-January 2021.

But as significant as China is to the world economy and commodity prices, the US, Japan and EU represent more than double its GDP (when calculated at market prices). They have embarked on quantitative easing (QE) on steroids – the US Federal Reserve took three years between 2008 and 2011 to increase the size of its balance sheet by the same amount as it did in 2020. 

“We look at adding commodities to portfolios from an optimisation and diversification perspective. Since 2008, and in our most recent calculations, the correlation with equities is high…  and the long-run expected returns are lower” – Jeroen Blokland

Asset purchases by the Fed, European Central Bank (ECB), Bank of England, Bank of Canada and Bank of Japan have totalled more than $5trn in the past year. US M3, broad money growth, was 22% annualised in 2020, compared with 15% in the quarter following the collapse of Lehman in 2008 and 19% in 1919 at the end of the First World War. Announced fiscal stimulus in developed nations is already 9% of total GDP.  

Strategists think that the case for a global economic rebound from COVID is already…