Commodities are generally cheap compared with 2022, when post-pandemic demand and the war in Ukraine caused inflation to surge.Kanoke_46/iStockPhoto / Getty Images
Commodities may be on many investors’ radar as an inflation hedge with U.S. president-elect Donald Trump returning to the White House this month.
“There’s a good chance today, in my view, to add commodities to the portfolio in case things go off the rails with Trump policy and higher inflation enters again as a risk,” says Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel in Calgary.
Large tax cuts and larger deficits, deregulation and tariffs could all fuel higher prices for U.S. consumers.
What’s more, commodities are generally cheap compared with 2022, when post-pandemic demand and the war in Ukraine caused inflation to surge, Mr. Pelletier adds, presenting a good entry point today.
A report published last fall from Oxford Economics forecasted slight upticks in pricing for food and industrial metals, but noted that “strong supply from commodities such as wheat, steel, and crude oil has also weighed heavily on prices and contributed to inventory build.”
The outlook for precious metals is much brighter. The Oxford Economics report noted that gold could see its price continue to rise well beyond 2025 partly due to central banks in emerging markets purchasing more bullion to diversify away from the U.S. dollar.
Curtis Gillis, portfolio manager and research lead for equities at CI Global Asset Management, also sees modest upside for the sector in the coming year, but not necessarily as a result of U.S. policies.
While certain measures might be inflationary in the U.S., he says, “The impact globally likely would be an offset.”
For example, a 25-per-cent tariff on oil and gas from Canada and Mexico would drive up costs for U.S. consumers, but it likely would also boost the U.S. dollar, putting pressure on emerging markets and even developed markets, reducing their consumer and industrial consumption.
Mr. Gillis says he would be surprised if the Trump administration goes through with tariffs “given how much the U.S. depends on Canadian heavy oil.”
A bigger driver of commodities demand is likely to be China, he adds. Its economy has been struggling, which doesn’t bode well for demand growth in the near term.
“For the past 20 years, China – not the U.S. – has been the biggest driver of commodity prices and demand,” says Jeff Mo, portfolio manager of Canadian small-cap equity and U.S. mid-cap equity strategies at Mawer Investment Management Ltd. in Calgary.
Should its economy rebound, base metals demand would likely take off, Mr. Mo says. But even so, he’s agnostic about commodities in 2025.
Both equity strategies Mr. Mo manages have very little exposure. “We try to have inherent contradictions in the portfolio” that benefit from commodity price volatility, he says.
The Canadian small-cap equity strategy, for example, holds companies such as Parex Resources Inc. PXT-T, a lower-cost, Calgary-based producer with assets in Colombia, and Pason Systems Inc. PSI-T, a technology provider for oil and gas exploration. Both would likely benefit if oil prices moved higher.
At the same time, the portfolio holds Winpak Ltd. WPK-T, a plastics packaging manufacturer whose “biggest input” is resin produced from oil, he says. Lower oil prices would likely boost its profitability.
Mr. Pelletier views Canadian oil companies as a “good hedge,” even against tariffs, as Canadian producers should still fare well because their revenue is in U.S. dollars.
If trade headwinds fade, the outlook would also improve as the global economy expands with a falling U.S. dollar in a risk-on environment. Oil and many other commodities traded in U.S. dollars would become more affordable in emerging economies, leading to more demand.
Not all commodities are likely to see the same traction. Mr. Gillis says base metals such as nickel already have ample production capacity to meet rising demand.
Copper, however, stands out with “the biggest deficit of supply and not having enough production to meet demand,” he says.
Copper prices are historically elevated, although below the record highs of 2022, and long-term demand is expected to increase with the electrification of the economy. That said, Marc Gagnon, vice-president and portfolio manager for North American equities with iA Global Asset Management in Quebec City, notes that price expectations for copper are already high. Consequently, his view on the price of copper for 2025 is neutral.
Others view commodities, in general, as a hedge against a more dire, long-term type of inflation.
“There is more than a reasonable chance that we are going to revisit in some fashion stagflation like the 1970s, in which the global economy grows very slowly but we see higher inflation,” says Jonathan Baird, editor and publisher of the Global Investment Letter.
“If that’s the case, the 1970s happened to be the best decade for commodity prices in probably the past 100 years.”
The challenge for advisors when using commodities to hedge these risks, or to get exposure to capture the long-term tailwinds for copper, for example, is their high volatility.
“Having direct commodity exposure long term can add a lot of volatility to portfolios,” Mr. Pelletier says.
He points to commodity futures-based exchange-traded funds (ETFs) as an example. In highly volatile commodity markets, ETF prices can swing unexpectedly to the downside as these instruments roll underlying contracts.
Even companies producing commodities are highly cyclical and tricky to buy and hold long term. Consequently, Mr. Pelletier’s approach is more tactical, aiming to seize opportunities in the sector when they arise.
Seeing some upside for 2025, about 10 per cent of portfolios he manages have exposure to companies producing commodities, he adds.
“Given the risk of a resurgence of inflation … a little exposure is not a bad thing,” he says. “But because of their volatility and the uncertainty for the coming year, you don’t want to go overboard.”