- Global equities have massively outperformed commodities since 2008
- But did ‘real’ asset prices put in a bottom in 2020?
- Gold and cattle already trade at all-time highs
- Merger and acquisition activity suggests miners think better times lie ahead
- Miners’ forecast profit and dividend contributions to FTSE 100 sit below historic averages, as a percentage of the total
“The all-time highs recorded recently by headline stock indices in the USA, Japan and UK are grabbing more headlines, but gold continues to set new peaks and the CRB Commodities index stands near levels last seen in 2008 to perhaps state the case for ‘real’ assets, after more than a decade of dominance from equities,” says AJ Bell investment director Russ Mould.
“Analysts’ forecasts for miners’ profits and dividends still look muted, in comparison to their historic average contribution to the FTSE 100’s total, and if commodity price strength persists, thanks to improved global growth or a wider inflationary problem, then producers and owners of ‘real’ assets could yet come back into favour after a long period of neglect.
“The putative coming together between Anglo American and Canada’s Teck Resources is the fifth $1 billion-plus merger and acquisition deal with a major focus on copper mining since 2022. Gold saw a similar rash of activity between producers of the precious metal earlier this decade, and that commodity price has since gone into orbit.
“It now remains to be seen whether copper miners’ management teams are similarly ahead of the game and providing investors with a hint as to where big commodity and share price moves may be coming next.
Source: Company accounts
“At just under $10,000 a tonne, copper trades within 12% of the all-time high reached in 2021, but the industrial metal is just one element of the CRB Commodities index, which is made up of nineteen different real assets, ranging from industrial and precious metals to energy to agricultural crops.
“The headline benchmark index stands 20% below its 2008 zenith. Energy is the chief culprit here, along with some agricultural crops and nickel, but gold, coffee and cocoa can all point to new highs in 2025.
Source: LSEG Refinitiv data. Within the index, agriculture has a 41% weighting, energy 39%, industrial metals 13% and precious metals 7%.
“Their momentum, along with gains in copper, means the CRB Commodities index is approaching a 17-year high all the same. A break-out to the upside by the index could be a telling sign.
Source: LSEG Refinitiv data.
“Commodities and ‘real’ assets have historically done well during periods of dollar weakness, or inflation, or both. Most commodities are priced in the US currency, so a falling greenback makes them less expensive to buy for those countries whose own counters are not tied to the buck.
“Meanwhile, rising prices may persuade investors to look for perceived stores of value and physical assets, and shun paper ones, such as cash and bonds, where purchasing power will be lost if the prevailing rates of interest and coupons languish below the rate of inflation.
“A drop in the dollar and a resurgence in commodity prices would represent a major change from the 2010s, when the buck was strong and a low-growth, low-inflation, low-interest-rate environment prevailed.
“Portfolio options that offered a reliable income (at a yield that exceeded inflation) or provided secular increases in profit and cash flow when growth was scarce shone in such an environment and that included long-duration assets such as government bonds, and ‘growth’ equities such as technology companies, while serial dividend growers and compounders were popular too.
“The question now is whether the resurgence of commodities means investors think the times are changing. It is possible that slashing interest rate cuts and more Quantitative Easing (QE) in response to Covid let the inflation genie out of the bottle after four decades in which central bank policy, Chinese and Eastern European entry to global trade flows and the emasculation of unions kept it stoppered up.
“It is also possible that President Trump’s desire to boost US growth by means of lower taxes, a lower dollar, lower energy prices, lower interest rates and less regulation could stoke rapid growth and further fuel inflation, especially if Germany and China embark upon fiscal stimulus of their own. Inflation, and thus rapid GDP growth, would, after all, help salt down many Western governments’ debt-to-GDP ratios, too, providing they can hold interest rates below the nominal rate at which economic output increases.
"Perhaps the CRB Commodity index is telling us that this shift to a higher-inflation, higher-nominal-growth world, where interest rates are more volatile, is already here. The benchmark has quietly outperformed the FTSE All-World equity index since 2020.
Source: LSEG Refinitiv data
“Sceptics will point out that commodities’ outperformance peaked in 2022 as Russia invaded Ukraine and prompted a scramble for raw materials such as aluminium, natural gas and oil, for which many had previously relied upon Moscow for supply. Equities have been back in the box seat since then.
“Analysts still seem unconvinced that a major regime change is upon us. The FTSE 100’s six mining companies are expected to produce just 5% of the index’s aggregate net profits in 2025 and pay out 6.6% of its dividends. The post-2007 averages are 10.2% and 8.3% respectively, while the peak profit contribution was 17.8%, in 2021, and highest dividend offering was 20.7% of the total, in 2020.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“This may catch the eyes of contrarians, or just of those who are weary of the letters ‘AI.’
“If raw material prices surge, for whatever reason, and miners’ profits and dividends get anywhere near to prior highs, then their current weighting within the FTSE 100’s total market capitalisation of 7.4% could look low, even if it looks about right today, given their estimated share of the index’s profits and cash pay-outs to shareholders.”
