There are a wide range of macro and micro reasons for the recent bear market, including overinvestment in the previous super-cycle, a glut of cheap capital thanks to quantitative easing, technological advancements and more. No matter the reason for this pullback in commodities, the conclusion is still the same; the industry has materially underinvested over the past decade. However change is on the horizon, and in our view, we are now entering a period where demand and supply are colliding to form the basis of the next bull cycle.
The introduction of policies designed to combat one of the sharpest drops in global GDP will likely continue to reflate real assets. Money supply is at an all-time high with record levels of stimulus being pumped into the financial system. In this environment, investor attention has already turned to inflation with the 10-year breakeven rate climbing steadily from COVID-19 lows to current 5-year highs. From a multi-asset perspective, the correlation is typically among the strongest between inflation (as measured by the inflation expectations illustrated by breakevens) and commodity-related asset classes.
Monetary and fiscal policies, along with ESG considerations, are ushering in the winds of potential inflation, creating a favorable environment for investors to consider exposure to natural resources.
Albert Chu, senior research analyst; Brock Campbell, head of equity research; and David Intoppa, senior research analyst, Mellon.
Doc ID: 573801