We think the asset class stands to benefit from our base scenario, while having the potential to outperform and act as a hedge should tail risks be realized.

Our second-quarter Asset Allocation Committee Outlook came out last week. Among other things, it sees us maintaining the overweight view on commodities that we adopted coming into the year.

Take out the second half of 2023, when we moved to a neutral view, and we have been positive on commodities since way back in October 2020. At the time, we cited the “reflationary forces” likely to be unleashed as we left the worst of the COVID-19 pandemic behind us. A few weeks later came news of a successful vaccine.

A lot has happened since then. So, why have commodities been such a persistent overweight view, and why do we continue to favor them for the year ahead?


We think commodities tend to do well in three environments.

In a reflationary environment, economic growth is rebounding from a slowdown and consumers and corporations restock depleted inventories, generating steadily rising demand for commodities.

An inflationary environment—or, more precisely, an unexpected spike in inflation—is largely caused by rapidly rising commodity prices, whether due to an unexpected disruption of supply or an unexpected burst of demand.

Finally, commodity prices often rise in a geopolitically volatile environment. This can be due to conflicts or disputes causing actual supply disruptions, and subsequent spikes in inflation, particularly if those tensions erupt in key production or transit areas for critical commodities like oil. But consumers often start paying a premium to secure supply even at the mere fear of disruption—and gold often benefits as a perceived catch-all tail-risk hedge.

A Supportive Backdrop

In 2021, the reflationary escape from the pandemic steered our view. In 2022, we upgraded our view to the highest overweight, anticipating reflationary forces becoming inflationary: An unexpected burst of demand fueled by fiscal stimulus packages ran up against the constraints of disrupted supply chains; and Russia’s assault on Ukraine made the geopolitical environment much more volatile.

Last year could have seen geopolitics stabilize around a stalemate in Ukraine, and rapidly rising interest rates trigger a disinflationary economic slowdown. That is largely why we shifted to a neutral view over the second half of 2023. Instead, economic activity moderated but proved much more resilient than many had expected, and the Hamas attack on Israel added a second major geopolitical flashpoint in a commodity-rich location.

The result is that 2024 looks set to be another year of reflation and geopolitical uncertainty—with the latter significantly raising the tail risk of a return to problematic inflation. In our view, that’s a supportive backdrop for commodities, as both a core exposure to economic growth and a hedge against inflation surprises.


The asset class has certainly been making headlines. Crude oil and gold are up 18% and 16%, respectively, since the start of the year. Unprecedented deficits in the cocoa market, caused by poor weather and crop hoarding, have seen prices in this commodity run up by 140% so far this year.

Our base scenario is reflationary: sticky inflation and a global economic recovery leading to relatively high nominal growth. This could be positive for both equities and commodities.

The last three weeks have given us another blow-out U.S. payrolls report, the third hot U.S. inflation release in a row, exceptionally strong U.S. retail sales, and the latest in a series of upgrades to the International Monetary Fund’s global growth forecasts. Even China, a persistent laggard since the pandemic, has managed to stimulate forecast-beating first-quarter growth of 5.3%. The 2023 manufacturing recession appears to be behind us, and Europe, in particular, has begun to restock after running down its commodity inventories.

We think this backdrop favors energy and industrial metals.

Typically, oil demand grows at about half the rate of the global economy. Inventories have been drawn down at a faster-than-normal pace over the past six months—and given current outlooks for expansion, we think demand could increase by around 1.55 million barrels per day this year. Given OPEC's cautious production approach, and little prospect of U.S. shale oil stepping into the breach, it could be a significant challenge to meet this demand.

Structural demand for copper and other industrial metals is already strong, in our view, as they are critical for the electrification and decarbonization of the economy, as well as for the build-out of 5G and datacenter infrastructure. The turn in manufacturing adds a cyclical impetus, and these commodities have also tended to benefit the most from non-recessionary rate cuts.


Among the risks to this reflationary scenario, the two we consider most likely would be supportive of commodities, in our view.

The first is geopolitical volatility. The recent escalation of Israel-Iran tensions highlights the vulnerability of Iranian oil and the flow of oil through the Strait of Hormuz. Although a complete closure by Iran is improbable, due to Oman's control over the shipping lanes, we see heightened risk to oil infrastructure and supply routes from proxy actions. 

The war in Ukraine still poses threats, too. Ukrainian attacks on Russian refineries are causing significant disruption, and Russian export facilities are also at risk. There are also new sanctions on Russian-produced metals to contend with.

Meanwhile, beyond the front-page geopolitical risks, more localized political risks can also cause outsized disruption. Take the Cobre copper mine in Panama, for example. Its owner, Canada’s First Quantum, has been forced to close it following public opposition and a ruling from the country’s Supreme Court that the terms of its contract were unconstitutional. This could remove as much as 2% from global copper supplies, which were already looking constrained due to large cost and production cuts from Anglo American.

The second risk is a return of problematic inflation—or the related risk of systemic volatility caused by debt-sustainability concerns or a loss of confidence in fiat currencies. Along with the deteriorating situation in the Middle East, this appears to be the main driver of the 2024 gold and silver rally. We see precious metals not only as beneficiaries of the structural decarbonization trend, but as hedges against the potential for the reflationary cycle to become uncomfortably hot.


The main takeaway from our latest Asset Allocation Committee Outlook is “breadth and balance.” We believe the backdrop of sticky-but-declining inflation and high nominal growth is largely positive for risky assets, but that full valuations in some parts of the market, together with inflation and geopolitical tail risks, support a broad and balanced exposure.

That creates a meaningful role for commodities in a portfolio, in our view. Thanks largely to the diversity within the asset class and its unique supply-and-demand dynamics, we believe it is one of the few investments that stand to benefit from our base scenario for 2024 while also having the potential to outperform significantly should tail risks to that scenario be realized.

In Case You Missed It

  • U.S. Retail Sales: +0.7% month-over-month in March
  • NAHB Housing Market Index: flat at 51 in April
  • China 1Q GDP: +5.3% year-over-year (NSA)
  • U.S. Building Permits: -4.3% to SAAR of 1.46 million units in March
  • U.S. Housing Starts: -14.7% to SAAR of 1.32 million units in March
  • Eurozone Consumer Price Index: +2.4% year-over-year in March
  • U.S. Existing Home Sales: -4.3% month-over-month in March
  • Japan Consumer Price Index: National CPI rose +2.7% year-over-year and Core CPI rose +2.6% year-over-year in March

What to Watch For

  • Monday, April 22:
    • Eurozone Consumer Confidence Indicator (Flash)
    • Japan Manufacturing Purchasing Managers’ Index (Preliminary)
  • Tuesday, April 23:
    • Eurozone Manufacturing Purchasing Managers’ Index (Preliminary)
    • U.S. New Home Sales
  • Wednesday, April 24:
    • U.S. Durable Goods Orders
  • Thursday, April 25:
    • U.S. 1Q GDP (First Preliminary)
    • Bank of Japan Policy Rate
  • Friday, April 26:
    • U.S. Personal Income and Outlays
    • University of Michigan Consumer Sentiment

    – Investment Strategy Team