Treasure not Treasuries

Friday, April 26th, 2024   Categories: Commodities, Diversification, Inflation, Seasonality

We are increasing our exposure to commodities

We believe US core CPI will remain above 3% for the whole of 2024 and that equities and bonds are likely to suffer in this environment. Diversification away from these asset classes is a good idea and commodities are the obvious choice. We have a long-only commodities model with 10 constituents which produces better returns and a similar Sharpe ratio to the S&P 500, despite the fact that it went nowhere between 2011 and 2021. (All commodity indices are still below their 2008 high.) We also have a simplified multi-asset model with three commodities – crude oil, gold and copper – capped at a total of 25% of the portfolio. This model beat our standard equity/bond model by an average of 400 bps a year between 1997 and 2007, the last time commodities enjoyed a major bull run. We think we could be about to repeat this part of the cycle and cite the recent uptick in M&A in the sector as evidence.