Commodities
With an improving economic outlook and higher real interest rates, the shine has come off gold, which has continued to fall. However, with the prospects of markedly higher real rates, the outlook for further falls may be more limited, short of more momentum-based selling. Furthermore, mining companies have suffered further with sentiment now at unusually low levels, even though operationally they continue to outperform. While the outlook for gold is therefore not as strong as it was in Q2 2020, as a balance to the equity allocations within portfolios it may be valuable, and the outlook is increasingly positive.
Conversely, oil has continued to rally as the prospect of reopened economies should lead to increasing demand. However, with significant production capacity still held back, the outlook for another significant leg higher is lessening. OPEC cut production sharply in response to the pandemic and will be keen to bring this back on stream once demand has recovered and the current $60-70 price may well be where they want to maintain. They will be cognisant that an oil price that is too high will accelerate the adoption of renewable alternatives, ultimately limiting their long-term revenues.
There has been increasing speculation of the start of another commodities supercycle, as the desire to build back better after COVID and rebounding economies spur demand. Higher commodity prices are a key argument for higher rates of inflation over the medium term to we will monitor developments here.
Property
Property has continued to recover as the prospect of an improving economy and fewer restrictions alleviate some pressure on tenants’ revenue. There continues to be a significant divergence between the outlook for the property sub-sectors. There are still doubts over the viability of some areas of the market, particularly retail.
Alternatives
The bulk of our alternatives continue to deliver robust performance. The JPM Global Macro Opportunities and First Sentier Global Listed Infrastructure that makes up the majority of our alternatives exposure within the Hybrid portfolios both delivered positive absolute returns in the quarter. We continue to believe that in the longer-term infrastructure will look increasingly attractive to investors looking for a long duration, inflation-protected income.
The gold positioning that we reduced but retained in July and October suffered once again over the quarter as economic prospects improved, lessening the appeal of this defensive asset. Furthermore, increasing real interest rates applied further downward pressure. With the likelihood of additional monetary and fiscal stimulus and with it the prospect of inflation, the price peak in this cycle may not yet have been seen. It is worth remembering that in 2008, the price peaked at $1,000, fell to $700, and was then followed by a rally lasting three years ending with a price of $1,900 in 2011.
