Forgotten commodities are set to play a key role

Since 2009, commodities have been the forgotten subject in asset allocation:

- Equities (and credit) outperformed commodities until 2020, but for the past 6 months, commodities have been taking their revenge.

- Commodity equities have been largely excluded from ESG management.

However, commodities represent a major financial and economic issue, due to the supply risks associated with the war in Ukraine.

Indeed, commodities have the most pronounced upward and stable trends among all major assets. Within the stock market indices, the commodity sectors are overwhelmingly dominant, but the security of supply and independence from Russia is a discriminating performance factor. Since the beginning of the Russian crisis, US oil companies have outperformed their European peers by 30%. In Europe, the basic resources sector dominates over the oil sector due to the greater detachment of companies from Russia. Furthermore, we are seeing large global commodity traders struggling to source supplies, meet delivery commitments and even fund themselves.

Commodities are currently the best safe-haven asset in the context of the Russian invasion of Ukraine due to supply risk in key commodity markets. They are the markets that are currently the closest proxy to the ultimate safe-haven asset, the VIX Medium Term. Although equity markets have initiated a global recovery, market liquidity has deteriorated across the financial system and remains deteriorated in credit, despite the lull in equity volatility. In the asset hierarchy, commodities dominate, equities are resisting and bond markets are the most penalized by the looming rise in rates on the one hand and the tightening of credit conditions on the other hand. However, given the unbridled rise in inflation expectations, the Central Banks must pursue their monetary tightening (8 rate hikes anticipated for the Fed over the next year) as they will no longer have the ammunition to rescue the credit market like the previously avoided crash over the last ten years.

The rise in commodities sows the seeds of a future credit crisis.

Comparative performance of commodities and international equities in dollars (source: Bloomberg)?

Average exposure to the main sectors of the MSCI Europe climate indices (source: Ai For Alpha)?

?Share of Russian production in global metals (source: S&P Global Market Intelligence)?

Share of Russian production and exports in world wheat in 2020 (source: FarmDoc)

Russian oil production in million barrels per day (source: Bloomberg, total production 100 million barrels per day)?

Comparison of the evolution of Oil & Gas indices in the US and Europe (source: Bloomberg)?

Normalized trend score for commodities (source: Ai For Alpha)?

?Market classification for the last year (source : Ai For Alpha)?

Stress Index heatmap and spider (source : Ai For Alpha)?

?