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Investment Management –

Top of mind: Is it time to pivot away from commodities?

Although bullish on commodities as a longer-term asset class, our view is that the expected contraction in manufacturing is likely to negatively affect commodities markets in the short-term.

Long-term, we believe commodities are a good investment. Mining companies have not invested heavily in developing new mines or oil fields, resulting in global undersupply of industrial metals and energy. Electric vehicles and the infrastructure around electrifying the economy means that demand for certain metals, such as lithium, cobalt, and nickel will be robust for the foreseeable future. The war in Ukraine also underscored the need for countries to build out their energy independence. Companies reshoring manufacturing capabilities and ensuring they can remain self-sufficient energy-wise is also a trend that will continue.

Oil has its own dynamics. Demand remains resilient yet the supply is constrained. According to Bridgewater, global oil demand was outstripping supply by 2% before Russia invaded Ukraine. The International Energy Agency recently forecasted curtailment of Russian supply would boost the deficit to 5%, which would be one of the biggest deficits we have seen in years.

These are all longer-term economic phenomena that are likely to place continued demand on raw materials; it is for this reason that we believe commodities are a good longer-term investment.

Should investors pivot away from commodities in 2022?

Despite our positive outlook, we are concerned about short-term volatility in commodities markets, such as crude oil, base metals, and agricultural commodities, which have performed well over the past year.

When growth starts to slow, commodities tend to hold up well for some time before falling. During the global financial crisis of 2008, equities markets plunged, and growth weakened, yet commodities remained robust until late in the cycle before experiencing sharp declines. So, is there a point at which we no longer want to hold commodities? To answer this question, we started to look at historical manufacturing economic indicators.

Specifically, we looked at when the manufacturing Purchasing Managers’ Index (PMI), the index showing economic trends in manufacturing sectors, shifted from expansion (PMI figure over 50) to contraction (PMI figure below 50), and importantly, when it remained in contraction for three consecutive months. We then compared commodity performance to equities and government bonds. We found that if economic manufacturing activity contracts for three months, commodities tend to perform poorly compared to equities and bonds.


Period Bloomberg Commodity Index S&P 500 Bloomberg US Treasury Index
31/01/1970 10.58% 0.15%  
31/07/1970 9.81% 17.32%  
30/09/1974 -14.43% 23.70% 6.20%
31/08/1979 32.05% 4.34% -1.54%
31/03/1980 7.76% 22.67% 12.70%
31/07/1981 -14.25% -11.04% 11.49%
28/02/1985 -1.34% 11.33% 15.61%
31/05/1989 3.17% 10.10% 6.87%
30/11/1991 -2.16% 11.88% 5.12%
31/05/1995 7.92% 14.76% 3.77%
30/06/1998 -13.41% 6.39% 4.76%
31/08/2000 -0.07% -18.99% 7.21%
29/02/2008 -21.15% -14.37% 1.32%
30/06/2012 1.42% 9.46% -0.20%
31/10/2015 -5.58% -1.71% 2.46%
31/08/2019 -4.16% 9.30% 3.11%
Hit Ratio   81% 79%


Currently, global activity remains expansionary. However, we expect this will contract in coming months in the United States and Europe as early signs of a recession gain momentum. To reflect this thinking, we have reduced our exposure to cyclical stocks, such as commodities and banks, and locked in some gains we have made from our commodities positions in the past year.

Commodity prices could still increase notwithstanding the global economy slowing. A scenario where this may play out would be if Russia cuts its supply of natural gas to Europe. This would send natural gas prices skyrocketing, and lead to further turmoil across the energy markets. However, in this event, European stocks would likely be negatively impacted.

We concluded that reducing commodity exposure, as well as cyclical exposure particularly in European banks, was the most prudent way to protect our clients’ capital.

Author -

Suzy Waite

Suzy Waite

Investment Writer, Arbuthnot Latham

Suzy joined Arbuthnot Latham in 2021 from Bloomberg. An experienced financial journalist, she previously worked at Euromoney Institutional Investor and Haymarket Media. She’s covered a variety of areas including hedge funds, commodities, equity capital markets and asset management while living in New York, London and Hong Kong.

Working closely with the Investment Committee, Suzy covers committee meetings, client events and writes macro thematic pieces. She also contributes to flagship campaigns.


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