The Broader Perspective: Inflation and commodity priced equities

Global stock prices have been heavily revised in commodities over the past 15 months, and if our view that we will find ourselves in a new commodity super-cycle within the next decade proves correct, investors need to fully understand asset allocation opportunities and increase their exposure to commodities . It's easy to get lost in the short-term hype of war, profit release and price movements, but the wider outlook suggests that there will be a dramatic repricing of stock prices in terms of inflation and commodities in the coming years.

About the Author

Peter potter - director of equity markets strategy in Saxo Bank. Develops investment strategies and analyzes of the stock market as well as individual companies, using statistical methods and models. Garnry creates Alpha Picks for Saxo Bank, a monthly magazine in which the most attractive companies in the US, Europe and Asia are selected. It also contributes to Saxo Bank's quarterly and annual forecasts "Shocking forecasts". He regularly gives comments on television, including CNBC and Bloomberg TV.

The pendulum tilts again

European stocks rose after information that a breakthrough in peace negotiations between Ukraine and Russia took place in Istanbul. Comments on the Russian side contributed to the increase in optimism that Russia would limit its activities in Kiev and that there was a possibility of Zelensky meeting with Putin. While stocks acted like happy cows seeing grass for the first time in a long winter, the commodities market initially suffered a sell-off, but since then oil and natural gas have sent out a clear signal that no breakthrough has occurred. The available data indicated that Russia had made a small regrouping of troops north of Kiev, and yesterday the Kremlin said that no breakthrough was achieved in the peace negotiations and much remains to be done; in other words, Putin has still not obtained sufficiently good deal terms to present the outcome of the war to his citizens as a victory or a victory.

As a result, European stocks fell by 0,9% yesterday and commodity prices rose again. To highlight the risks to Europe, Germany announced it is going into crisis mode for natural gas supplies after Russia demanded to settle the payment in rubleswhat the EU does not want to do. If Russia escalates by limiting gas supplies to Europe, it could mean heat supply interruptions for many days and disruptions to industrial processes in Germany. Part of the German solution to reducing dependence on Russia is forging new partnerships, such as the recent agreement with Qatar, significant investments in LNG in Tanzaniaand also included agreement between Fortescue and E.ON for green hydrogen production to cover a third of the current natural gas consumption in Germany. Although green hydrogen is expensive, this solution has become feasible not only due to national security requirements, but also due to the exceptionally high prices of natural gas in Europe; moreover - as we wrote recently in the article about the action - hydrogen is a key pillar of the future, and existing natural gas infrastructure can be easily modified to handle hydrogen.

Shares without resources are a dangerous game for investors

Investors often fall into the trap of short-term hype, forgetting the bigger picture. Even before the war in Ukraine, the world had hit the wall in the sense that the physical world was too small to meet the enormous demand created during the pandemic. Years of neglect of investments in energy and metals have finally taken their revenge. The war in Ukraine has intensified changes in the commodity markets, but the last weeks of the bull market in the stock markets and the recent reaction to the potential peace do not match the reality.

In February 2022, global equities had declined for 15 months in commodity markets and were below 24% lower than commodities. This is the largest relative sell-off of stocks since 2008. More importantly, however, when you look at the broader relationship between stocks and commodities since 1969, you can see two periods in which stocks were dramatically overestimated in terms of the physical world - these were the 70s. . and the first decade of the 2009st century, covering the two previous raw material supercycles. Epic stock performance against commodities in 2020-10 was a historic period in which the world's greatest profit engines achieved them with little input of commodities. Over-generation of wealth has deprived the world of investment in the physical world, exposing the economy to a massive supply-constraint shock. The next 70 years will be marked by another commodity super-cycle and poor performance of the action in relation to the physical world. Equities may remain unchanged or increase slightly, as they did in the XNUMXs, but under inflation or commodity prices, they will underperform.

It is therefore of the utmost importance that investors who have invested 12% in stocks over the past 100 years begin to understand the nature of commodities and the opportunities associated with asset allocation. Otherwise, the coming decade will be lost to them in advance.

The main subject areas worth investing in the current conditions are still logistics, cyber security, commodity sector, defense and green transformation. At the macro level, inflationary assets such as inflation-protected bonds and commodities will outperform the nominal performance of equities and bonds.