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Investors jump into commodities while keeping an eye on recession risk | Business section

NEW YORK (Reuters) — Investors are rushing to recalibrate their portfolios for a potentially prolonged period of high commodity prices, as Russia’s invasion of Ukraine triggers dramatic moves in commodities that threaten to exacerbate inflation and impair growth.

Wild moves have been the norm in commodities in recent weeks as the war in Ukraine and subsequent sanctions on Russia helped push oil prices to 14-year highs and gas prices natural at record levels. Wheat and copper prices are near all-time highs, while a doubling in the price of nickel earlier this week forced the London Metal Exchange to suspend trading in the metal.

With the US economy already feeling the stress of a broad post-Covid-19 demand surge and a quick resolution of the West’s standoff with Russia in doubt, some investors are betting prices high commodity prices will likely remain for the foreseeable future.

Investors have funneled $10.5 billion into commodity-focused ETFs and mutual funds since the start of the year, including a gain of $2.8 billion in the past week. ended on March 2, which was the largest one-week positive influx since July 2020, according to data from ICI.

“It’s a very unique environment that we find ourselves in because you have both demand shocks and supply shocks in the system,” said Eric Marshall, portfolio manager at Hodges Capital.

Marshall believes demand for commodities should remain strong even as geopolitical tensions ease, fueled by factors such as electric car battery production, which requires metals such as copper and nickel. A $1 trillion US infrastructure bill passed in November is increasing demand for steel, cement and other commodities, he said.

It is increasing its stake in steel producer Cleveland Cliffs Inc and agricultural companies Tyson Foods Inc and Archer Daniels Midland Co, while cutting positions in consumer companies most likely to feel the brunt of rising gas costs and materials.

Massive commodity rallies have increased pressure on the Federal Reserve and other central banks to tighten monetary policy and fight inflation. This has heightened concerns that it will hurt economic growth as rising prices are already weighing on consumers.

Investors widely expect the Fed to announce the first rate hike since 2018 at the end of its monetary policy meeting next week and have forecast a tightening of 1.75 percentage points this year. Data this week showed consumer prices rose at their fastest pace last month in 40 years.

Matthew Schwab, portfolio manager of Harbor Capital All-Weather Inflation Focus ETF, increased his exposure to oil and metals futures. Industrial metal prices are expected to remain high due to underproduction during the coronavirus pandemic, while oil companies appear content to trade lower production for higher prices, he said.

“You can see the signs of rising commodity prices in the lack of investment over the past decade,” Schwab said.

Mark Khalamayzer, lead manager of the Columbia Commodity Strategy Fund, increased his exposure to oil and agricultural commodities to the highest limits allowed by his fund’s prospectus, betting that the conflict in Ukraine will drive prices higher.

Brent crude settled at $112.67 a barrel on Friday and is up 44% year-to-date.

Even as investors try to align their portfolios with expectations of rising commodity prices, they worry about how the rally in commodities could hurt growth.

The risk of a recession driven by a sharp reduction in consumer spending increases the longer oil prices remain high, said Robert Schein, chief investment officer, Blanke Schein Wealth Management.

“If oil prices stay well above $100 a barrel for a few months, the consumer and the economy can handle that, but if oil prices above $100 last longer than six months, that’s at that time we will see the risk of recession increase,” he said.