10 Reasons Why CommoditiesLAZARD GLOBAL COMMODITIES

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1. Build a bridge to the new economy Commodity trading is indispensable in the production and delivery of the fossil fuels that power today’s economy, and it will be equally indispensable as energy markets evolve. Global futures markets are developing for the trading of carbon allotments as well as wind and solar power. And even now many of the components of tomorrow’s transport—such as the rare metals used in batteries for electric vehicles—trade on futures exchanges.

2. Invest in the global recoveryCommodity returns rise fastest when business confidence returns and the pace of economic growth begins to quicken. Base commodity demand does not vary—people have to heat and eat regardless of economic conditions. As the business cycle revives, as it has recently, incremental demand should surge.

Rising Inflation

Average Month-on-Month Change (1990–Present)

(%)Commodities Equities Bonds

-3

-2

-1

0

1

2

5%+ Inflation(11 Months)

3%–5% Inflation(73 Months)

2%–3% Inflation (53 Months)

1%–2% Inflation (25 Months)

As of 30 November 2017Inflation was rising in 167 months and not rising in 167 months. Months of rising inflation are defined as those in which the year-on-year % change in CPI exceeds its 12-month moving average. Commodities are the S&P GSCI Total Return CME. Equities are the MSCI World Index. Bonds are the Bloomberg Barclays GlobalAgg Total Return Index Value Unhedged USD. Source: Bloomberg, Bureau of Labor Statistics, Haver Analytics

3. Profit from inflationJust as rising commodity prices drive consumer price inflation, they also drive commodity returns. No other asset class responds more or more consistently to heightened inflation and inflation expectations. At low inflation levels like those currently, commodities have historically delivered positive returns in contrast to equity and fixed income markets, and these returns have remained positive when inflation has become extreme.

Commodities Outperformed when Rates Were Rising

Average Month-on-Month Change (1990–Present)

(%)

Commodities Equities Bonds

-0.5

0.0

0.5

1.0

1.5

Fed Funds Rate Not Rising (235 Months)

Fed Funds Rate Rising (100 Months)

As of 31 December 2017Commodities are the S&P GSCI Total Return CME. Equities are the MSCI World Index. Bonds are the Bloomberg Barclays GlobalAgg Total Return Index Value Unhedged USD. Source: Bloomberg, Federal Reserve Board, Haver Analytics

4. Stay ahead of rising rates Unlike stocks and bonds, interest rates have not directly affected commodity returns. As a result, they have complemented intermediate and long-duration bond allocations, which typically lag as rates increase.

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5. Take advantage of a $49 trillion opportunityAfter the global financial crisis, infrastructure maintenance took a back seat to financial reconstruction. Roads, railways, and bridges fell into disrepair. Altogether, according to a study by the McKinsey Global Institute, the recovering global economy has accumulated a US$49 trillion backlog of infrastructure projects. Meeting this critical challenge promises to vastly increase demand for industrial commodities like copper, cement, and steel.

Global Infrastructure Needs Are High

US$49.1 Trillion in Aggregate

(% of Global GDP)

0

1

2

3

4

Water

Power

Rail

Roads

AirportsPorts

Telecom

As of 31 December 2017Source: McKinsey Global Institute, “Bridging Global Infrastructure Gaps”, June 2016. Data displays the expected aggregate need between 2016 and 2030.

6. Add a shock absorber to your portfolioUnexpected disruptions in commodity supplies caused by natural disasters or geopolitical upheavals have a silver lining for investors. They drive up commodity returns even as they weigh down stocks and bonds.

7. Invest in a newly liquid asset classIn the past two decades, the commodities market, once the exclusive domain of producers and industrial consumers, has opened to investors. They can access commodities through private equity or passive index funds, and today they can invest in actively managed portfolios.

8. Tap into a different source of performanceCommodities today have resumed their traditional role as a portfolio diversifier. The low correlation between commodities and fixed income has been stable, but after the global financial crisis, commodities and equities developed nearly the same pattern of return. Recently, their performance has diverged, making it more likely for commodities to perform when equities do not.

9. Layer on diversificationThe low correlations between commodity sectors take the benefits of asset class diversification to the next step. The direction of corn prices has little bearing on the direction of oil prices, for example. Such distinctions make room for active commodity management. Instead of treating commodities as a single undifferentiated asset class in the manner of commodity index funds, the active manager can seek out value among widely differing commodities sectors.

10. Cushion currency effectsCommodities are priced in US dollars. When the dollar strengthens, it adds to the profits of commodity exporters as they convert them to local currency. Conversely, when the dollar weakens, commodity demand in the non-dollar world strengthens.

Important InformationPublished on 1 October 2018.

Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. The MSCI Index Data may not be further redistributed or used as a basis for other indices or any securities or financial products.

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