Natural resources: rich in inflation-protecting properties

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Summary

  • While stronger demand has fueled a sustained rise in commodity prices since the pandemic slump in 2020, news of Russia’s invasion of Ukraine has driven commodity prices to new highs. .
  • Natural resources have outperformed the broader market since March 2020, thanks to improving demand and inflationary pressures.
  • A barbell approach to an allocation of natural resources across a broad equity portfolio could be an attractive way for investors to gain more meaningful exposure to sectors that are better positioned for today’s inflationary environment.

Since Russia invaded Ukraine on February 24, commodity prices have risen sharply as markets digest the potential supply-side impacts of sanctions against Russia, one of the world’s largest commodity exporters. world. The situation threatens to exacerbate the record inflation that is already plaguing global economies. Today’s note highlights recent events in commodity markets that amplify inflationary pressures and how natural resources could be an attractive investment in the current environment.

Commodities skyrocket following Russia’s invasion of Ukraine.

While stronger demand has fueled a sustained rise in commodity prices since the pandemic slump in 2020, news of Russia’s invasion of Ukraine has driven commodity prices to new highs. . The most pronounced impacts have been seen in the energy, metals and agricultural commodities markets where Russia and/or Ukraine are major global exporters. Russia is one of the world’s leading exporters of crude oil and the largest exporter of natural gas. Russia is also the largest wheat exporter, while Ukraine is the fifth. Together, they account for nearly 30% of the global wheat export market.(1) In addition, Russia is also among the largest producers of aluminum, nickel, palladium, cobalt and other metals and raw materials manufacturing critical.

On March 1, WTI crude oil closed above $100 per barrel (bbl) for the first time since 2014, reaching $130 per barrel intraday on March 7. On the same day, US natural gas prices at Henry Hub topped $5 per million. British thermal unit, while Dutch gas prices at the TTF hub, the first European benchmark, closed at the highest level on record. Wheat futures traded at the limit (i.e. the maximum increase allowed in a single trading day) for five consecutive days during the first week of March and surged to $14.25 per bushel on March 7, their highest level since 2008. On March 8, nickel prices surged and briefly exceeded $100,000 per metric ton on the London Metal Exchange (LME), forcing the LME to suspend the nickel trade. While commodities that have risen sharply, including oil, wheat and nickel, have fallen from record highs, commodities overall remain near multi-year highs.

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Advocacy for natural resources in a context of inflationary pressures.

The supply shocks resulting from the Russian-Ukrainian conflict come at a time when energy and food inflation is already galloping. As reported by the US Bureau of Labor Statistics, inflation hit 7.9% in February on an annual basis, with rising food and energy prices contributing to the highest CPI in 40 years. (2) Additionally, the Food and Agriculture Organization of the United Nations reported that global food prices also hit a record high in February. (3) The commodity surge agriculture could further aggravate global food inflation, as the effects of the disruptions ripple through food supply chains. Meanwhile, energy prices could continue to come under upward pressure as the Russian-Ukrainian conflict has triggered what could be the biggest energy supply crisis in decades, according to the International Energy Agency. energy.(4) Historically, commodities have served as a viable hedge against inflation. This outperformance of commodities also corresponded to periods of positive economic growth coinciding with the reopening of the global economy.

Investors seeking exposure to rising commodity prices, either as a hedge against inflation or for capital appreciation, may find it difficult to invest in commodity futures. Trading contracts can be complex for many investors, and owning commodity futures contracts makes it difficult to diversify exposure. An index approach could provide exposure to multiple commodities through a more familiar product structure like an exchange-traded fund. Equity-based natural resources ETFs provide exposure to commodities through companies directly involved in natural resources and commodities. Compared to an equity-based approach, an ETF based on commodity futures may have more volatility and may be negatively impacted by the need to enter new contracts as first-month contracts approach expiration. expiry.

The VanEckMT The Natural Resources Index (RVEIT), which is calculated by S-Network Global Indexes, includes companies involved in the production and distribution of commodities and commodities-related products and services in the following sectors: Agriculture, Alternatives (water and alternative energies), Base and industrial metals, energy, forest products and precious metals. Strong demand for commodities and natural resources has helped RVEIT outperform the broader market since March 2020, during a period when inflation also continued to edge up. As record inflationary pressure and rising interest rates have put pressure on broad equity indices over the past few months, the RVEIT has continued its upward trend.

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Integrating natural resources into an equity allocation.

With continued uncertainty ahead and no clear signs of easing inflationary pressures, a barbell approach could be used to embed a natural resource allocation into a broad equity portfolio. The chart below provides representative examples of the combination of natural resources, represented by the RVEIT, with a broad equity allocation, represented by the S&P 500, and how sector exposures would change. For example, a 25% allocation to RVEIT could moderate exposure to heavily weighted sectors like technology that may come under continued pressure from rising interest rates, while increasing exposure to commodity-related companies in the industrials, consumer staples, materials and energy sectors. These sectors tend to have more inelastic demand, fare better in rising rate environments, and could benefit from inflation given the pass-through nature of their business.

Asset 34Conclusion:

Given the current recovery in global demand for commodities, supply shocks resulting from the effects of the Russian-Ukrainian conflict are likely to exacerbate inflationary pressures. RVEIT provides investors with access to global growth and can serve as a potential hedge against inflation.

The VanEck Natural Resources Index (RVEIT), which is calculated by S-Network Global Indexes, is the underlying index of the VanEck Natural Resources ETF (HAP).

[1] How a Russian invasion of Ukraine, the ‘breadbasket of Europe’, could hit supply chains

[2] U.S. Bureau of Labor Statistics: Consumer Price Index Summary – February

[3] Food price index hits record high in February, UN agency says

[4] Oil Market Report March 2022, International Energy Agency

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