23.10 Liontrust Views Autumn 2023 Literature (Single) - Flipbook - Page 11
The rising cost of energy, food and other
essential goods over the past several months
has had a negative impact on millions of
households. While the latest figures from
the Office for National Statistics show that
the rate of inflation fell from 7.9% to 6.8%
in the 12 months to July, prices are still rising
steadily. Furthermore, core inflation – which
strips out food and energy price movements –
remained static at 6.9%.
The term commodities typically refers to
natural resources and materials which
are consumed or used by people. This
includes commodities that are mined, such
as Brent crude oil – one of the most traded
commodities on earth – and natural gas. It
also covers precious metals – gold, silver,
platinum – and industrial metals – those
used for manufacturing or construction, such
as steel, aluminium or copper. Agricultural
commodities include raw materials such as
coffee, wheat and cotton.
The huge increase in energy and food
prices over the past year or so has been as
a result of agricultural commodities such as
wheat reaching record highs, while crude
oil and natural gas prices rose by around
60% in 2022.
Meanwhile, gold has also performed
relatively strongly so far in 2023, along
with other precious metals, not least due to
the ongoing economic uncertainty caused
by high inflationary environments across
much of the developed world and steadily
rising central bank interest rates.
In many cases, commodities represent the
purest form of supply and demand. As an
example, with agricultural commodities,
demand is typically fairly constant, though
this can vary, but the supply side is more
volatile, dependent as it is on weather
conditions. An unusually cold or wet season
can damage crops and affect the supply of
wheat even when demand remains high.
Why invest in commodities?
While cash savings rates have improved
in recent months, the high inflationary
environment means that in real terms
the value of cash holdings will still be
eroded. In contrast, commodities are one
of the few asset classes that can protect
The huge increase in energy and food prices
over the past year or so has been as a result of
agricultural commodities such as wheat reaching
record highs, while crude oil and natural gas
prices rose by around 60% in 2022.
against inflation; in fact, the relationship
is causal and a large part of headline
inflation is typically driven by ‘consumption
commodities’ through rising energy and
food (agricultural) prices.
The exception to this is gold and, to a lesser
degree, other precious metals, which are often
driven by sentiment and which people head
to when markets are uncertain or volatile.
However, it is important to note that
commodity prices can move up and
down quite sharply (called volatility by
investment managers). This is why exposure
is recommended as part of a diversified
portfolio of other ‘real’ assets.
Mayank Markanday, Head of Liontrust’s
Diversified Real Assets Fund, says: “This
volatility is in part due
to seasonality in prices
(especially for agricultural
commodities) but commodities
are also vulnerable to external
events such as bad weather
conditions that may lead to low
crop yield or geopolitical events.
markets, although it is possible to invest in
gold and silver on a lower scale by buying
coins or bullion for example. However,
directly investing in other commodities such
as coffee, oil or wheat will typically involve
storage costs and are not practical for most
investors.
Most investors, therefore, choose instead to
gain exposure to commodities as a broad
asset class, whether through a pooled fund
or an exchange traded fund (ETF), with the
latter tracking the performance of a single
or multiple commodities.
Markanday says: “While commodity
markets may not be as straightforward as
traditional asset classes and sectors, they
can be a source of valuable diversification
from stocks and bonds. Due to the volatility
of the asset class, we advocate a diversified
approach of owning commodities as part
of a broad-based portfolio.”
“Recent examples include the
Russian withdrawal from the United
Nations-brokered grain deal – the
Black Sea Initiative – which
allowed Ukraine to
continue exporting
more than 30
million tonnes of
wheat to global markets.”
How to invest
Investing in commodities can be tricky.
Investing directly in commodities is usually
done by professional traders dealing
in large volumes and using specialist
instruments such as futures on financial
LIONTRUST VIEWS – AUTUMN
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