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Having spiked in the first couple of weeks of January, bond yields are now back below where they started the year. Good! This means lower borrowing rates for companies and lower mortgage rates for borrowers. One longer term tailwind the bond market has comes, I think, from commodity markets. As an example, oil futures are still pointing down (and I am struck in the chart below by how well the futures market has done recently in predicting moves in the spot oil price):
This should mean the cost of filling up your car and transportation more generally should continue to drift lower having spiked viciously in 2021 and 2022. The other major energy cost we all face is electricity. The marginal producer of electricity (and so the driver of the electricity price) is gas. Gas prices in Europe spiked after Russia supply more or less ended in 2022. They are also expensive today after a European mid-winter cold snap. The longer term picture remains more optimistic though. The US and Qatar are investing huge amounts in building export capacity which should start arriving here in 12 months or so. If the gas futures markets are right then broader energy costs for Europe should be back to pre-Covid levels in around three years. And any Ukraine peace deal might see prices fall sooner if Russian gas supplies are turned back on.
All this does not make energy commodities and energy producers look like a particularly great investment opportunity to me. The MSCI Energy Index is up +73% over the last 10 years compared to +187% for the broader MSCI World Index. I am not sure I see much of a catalyst for change looking forward. So why bother with commodities at all? One reason is they remain a good portfolio asset. Wars and supply disruptions cause spikes in commodity prices which can be a hedge when other assets are falling. But that said, given we run longer term focused risk controlled portfolios I’d rather own assets today with more attractive longer term expected return profiles.
Which brings to the one (literally) shining star of the commodity complex: Gold. This commodity has two key attractions. First government deficits remain high and debt levels are growing. Gold remains a hedge should any problems emerge in government debt markets. Second, the China/Russia block continues to try and diversify away as fast as it can from US dollar assets. Gold is an obvious beneficiary. We added gold to client portfolios last year and there is a good case for adding to our position tactically in 2025.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
