Investment opportunities as demand for commodities grows

Higher inflation will likely remain a risk for investors over the medium term. The good news is that this outlook for higher inflation is based in part on strong demand for investment and commodities.

“Under that inflationary story, we have a good macro environment for investors, with strong investment across the globe,” said Éric Morin, senior analyst with CIBC Asset Management, in a recent interview. 

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“The bad news is that we do expect commodities to make a positive contribution to sticky inflation,” Morin said.

While higher inflation is a concern for investors, “because commodities are highly correlated with inflation, commodities are a solution or something to take into account in the construction of a portfolio,” he said.

In addition to acting as a hedge against inflation, commodities can act as a hedge against geopolitical and climate tail risks, he said. Commodities can also improve diversification, and may enhance expected returns.

Morin was “upbeat” on several commodities, he said, given elevated demand.

He described the factors influencing that demand: geopolitical risk, the housing shortage and the need for significant infrastructure investment.

“Geopolitical risk is a reason to expect strong investment,” he said. For example, technology and manufacturing investment should remain strong as the U.S. competes with China.

The housing shortage in several countries, including the U.S. and Canada, could persist for several years. “We estimate it will take about three to five years of new investment to restore a more reasonable balance in the housing market in Canada,” Morin said.

Similarly, public infrastructure, especially in areas such as U.S. surface transportation and water infrastructure, will require significant investment, as will the renewable energy transition.

In addition, India’s rapid economic rise will drive global commodities demand over the next decade, Morin said. India could soon overtake China as the world’s economic growth engine.

“Our outlook is that India will contribute to nearly one-third of incremental energy demand in the next 10 years,” he said.

Plus, India’s low urbanization rate, currently at 36% compared to China’s 64%, suggests that significant infrastructure investment is on the horizon. 

“The rise of urbanization in India will require … a lot of demand for several commodities,” Morin said, citing coal, copper and nickel.

Additionally, gold, which holds cultural significance in India, is expected to rise in price as the country’s wealth grows, he said.

Morin added that India’s demand for oil is set to increase.

“That should mitigate or reduce the downside pressure on energy inflation, oil inflation, coming from the global energy transition,” he said.

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.