A bull market in raw materials on the way

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A bizarre year comes to an end
A bizarre investment year is nearing its end. The spectacular recovery since the bottom at the time of the first corona wave was marked by one after another All-Time High on the stock exchanges. Bonds, too, continued to rise. As a result, interest rates fell to unprecedented depths. Despite the historically low-interest rates at the start of this year, bond investors were still able to make some returns. Finally, 2020 was also a surprisingly good year for homeowners. In fact, the developments in the markets mentioned — equities, bonds, and real estate — were no more than a continuation of what we have seen over the past decade. The past decade has been characterized by a booming bull market in equities, bonds, and real estate.

A forgotten asset class
Another asset class stood out quite sharply. Contrary to the above three, the raw materials ended up forgotten. The Bloomberg Commodity Index has only declined over the past decade. In 2008, this index reached its top with 237 points after many years of the commodity boom and then continued to decline in value. Up to the current level of 76 points, 68% lower. Indeed, the past decade has not been an unqualified success for commodity investors. In addition to oil and gas, the index also includes precious metals such as gold and silver, industrial metals such as copper, zinc, and nickel, and so-called soft commodities such as coffee, cocoa, sugar, corn, wheat, soybeans, fruit, and livestock.

A decade of technology and interest rates

The focus of investors’ attention over the past decade on technology funds and interest rates, however, could change in the years to come. After all, technology funds, bonds, and real estate mainly benefited from constantly falling interest rates. Interest rates have now fallen to such an extent that they are starting to lose some of their elasticity. Not that a substantial rise in interest rates is now expected in the short term, far from it. But how plausible is it to expect a repeat of the past ten years? There may well be an investment climate in which a ‘forgotten’ asset class could come back to life.

Investment in infrastructure
It is not only the interest rate that plays a role in this. For example, the world’s largest consumer of raw materials — China — seems to have shaken off the adverse effects of the pandemic. China is the only leading economy that is even growing this year. Large-scale investments in infrastructure have boosted demand for iron ore, copper, and other raw materials. For example, since March, the price of copper has risen by 67 and the price of iron ore by as much as 120%. The Bloomberg Commodity Index rose by just under 30% during this period. But there is more.

Ocean of savings
The pandemic contributed to the fact that a large proportion of the population — those who kept their jobs and their incomes — could not spend their incomes, or could spend them only to a limited extent. As a result, the financial situation of many consumers is better than ever. Where income remained the same or fell slightly, expenditure fell much more sharply. This, together with the rise in shares, house prices, and huge state aid, has resulted in an unprecedented savings surplus. In the United States, there is even talk of an increase in the household net wealth of USD 5 000 billion since the end of 2019. This ocean of savings is going to be spent again at some point on things that it cannot be spent on at the moment. Developments around the vaccine will determine time and pace, but it will happen.

Demand for raw materials
It will give an enormous boost to the economy. Together with the huge investments in the energy transition — solar panels, wind farms, electric cars — it will make the demand for raw materials explode. Think of all the copper and silver needed for this. China has already announced that it will triple its capacity in solar and wind energy over the next ten years. According to Trafigura, the energy transition could increase the demand for copper by 40% in ten years. And this at a time when the supply of these raw materials is faltering. Equities are expensive, although not as expensive as bonds. They are even more expensive. Housing prices are unaffordable for more and more people. Raw materials? The index is 68% below its 2008 peak. And should inflation still rise in the coming years — even if only slightly — then raw materials are nice protection against that.

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