With this secular super-cycle in mind, the Commodities Team at TDAM recently published a paper titled Anticipating a new commodities super-cycle, Observing early signs of a bull market in commodities. The article outlines some of our teams' early observations for a bull market in commodities and importantly discusses the importance of commodities in portfolio construction.

Of particular interest in the article is the discussion about the current environment for commodities and how some of today's dynamics didn’t exist (or weren’t as impactful) in the past, with the most prominent being our concern for the climate and Environmental, Social, and Governance (ESG).

A necessary focus on ESG, climate-change and the energy transition might prove to make this cycle unique. Demand for certain commodities, particularly those needed to foster the energy transition (the inputs in electric vehicle battery production for example) will find support, while supply of others (primarily commodities that contribute to increased greenhouse gases) becomes restricted. For example, the transition from carbon fuels to renewable fuels will hinder the supply of commodities like oil and gas, while boosting demand for others used in electric vehicles and power generation and distribution like copper and nickel.

Moreover, supply and demand balances for many commodities have started to reflect years of reduced capital expenditure and underinvestment. Demand, on the other hand, despite efficiency gains and substitution, continues to grow. It is this landscape that forms our view that we are in the early stages of a period that should see higher commodity prices and returns. Although prices are elevated in nominal terms, when adjusted for inflation, prices are still not considered expensive.

Investors are motivated to invest in commodities for three primary reasons: inflation protection, portfolio diversification and expected returns, and for these reasons we feel that the addition of commodities is an essential consideration in portfolio construction. The addition of commodities to a portfolio today is very timely given their performance, both relative and absolute as well as in periods of increased inflation and inflation uncertainty, just like the one we are experiencing today.

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