Shining the Light on Commodities

Foreign exchange management, ethical investing, and LaIF themes overlay LaIF’s five, risk/return strategies.  LaIF themes are emerging trends that translate into actionable allocations; where we “shine the light”. Currently, we are looking with great interest at only specific commodities, within their heterogeneous asset class.

Three drivers support the commodities investment theme.  Post-pandemic growth is coming despite the jump in US job claims last Thursday. It really reflected the many “discouraged workers” who are returning to hunt for jobs. And as noted in our last blog, some inflation is a sign of growth, too. And though the latest, more hawkish (indicating higher interest rates) Fed statements caused a dip in equities for the last two days, the immediate setback in commodities appears to be stabilizing.

Transformation to clean energy is not just about trailblazers like Tesla. All car manufacturers understand that the future is electric. And the third driver is infrastructure initiatives. From IT to public transportation systems, roads and bridges: developed cities are about to get badly needed overhauls. And with renewed solidarity among the G7, the West again can provide a serious alternative to China for developing infrastructure around the world, too.

But exactly where to shine the light in this asset class is key. For instance, condemning big oil firms to extinction could be a costly mistake. When Dutch courts ruled on May 26th against Royal Dutch Shell, requiring the oil giant to reduce its greenhouse gas emissions 45% by 2030, the stock price fell 4%…before rebounding by +11%. We own Royal Dutch as well as ENEL. And though higher USD interest rates hurt the broader asset class, not all commodities are vulnerable, and our long USD is a nice hedge.

To participate in the conversion to electric, invest in rechargeable battery input commodities: lithium, cobalt, nickel, graphite, manganese, copper and aluminum are set to soar. We have owned Porsche for several months. And relevant to infrastructure, we are, or will soon be taking advantage of current price dips to add Siemens, Vinci, 3M, SPX Corp and Caterpillar to our equity allocations.

And then there is H2O. Climate change in the West has been causing extreme drought for 30 years, and this summer is literally heating up to be a doozy. Futures tied to water prices in California were launched on the Chicago Mercantile Exchange last December. We own Xylem Inc, a water technology company.

Not just which commodity, but which vehicle for exposure to choose – futures and options contracts, equity allocations to producers, structured products, actively managed funds and ETFs – requires a deep understanding beyond supply and demand. No matter how bullish, prudence and experience are of especially deep value in the commodities asset class. But shine the light just right, and in the next few months and even years, you will participate in phenomenal growth.

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