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Market Update

Commodity investments for portfolio diversification

After years of stagnation, commodities are surging, driven by supply shortages, global shifts, and geopolitical tensions. Stefan Steiner explains how commodity trading strategies have outperformed, providing diversification and risk reduction, and why this trend is likely to continue.

Commodities had a strong price movement in the 2000s and were abruptly stopped by the 2008 financial crisis. After a brief rebound, a 10-year bear market followed until the summer of 2020. The  Bloomberg Commodity Index was thus back at its starting point after 20 years. The situation looks better for commodity trading strategies (re-presented by the SG Commodity Trading Index) that were able to take long and short positions. Here, capital was largely preserved in the bear market and the total return over the 24 years is significantly better than long-only commodity investments or stock market investments measured by the MSCI World TR Index as shown in the chart.





For the past 4 years, commodity markets have turned and prices have risen significantly. This is due to a lack of investment during the bear market and the global shift towards renewable energies. Added to this was Russia's war of aggression against Ukraine, which triggered shortages. We believe that this commodity cycle will continue for some time and commodity traders will benefit from large price movements in both directions. Commodity prices are still record low compared to stock prices, which makes a shift from equity to commodity strategies attractive and significantly reduces the risk of the overall portfolio through diversification effects.

The chart below illustrates how commodity markets turned around after the Covid pandemic and achieved similar returns to equity markets since the summer of 2020. The commodity trend should continue, while consolidation in equities is becoming increasingly likely.




 

Published by

Stefan Steiner

July 30, 2024

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