This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Most Kepler Trust Intelligence readers are probably aware that 2022 has brought with it a boom in commodities markets. A perfect storm of logistics problems, shortages, and inflation have all combined to produce substantial price rises in everything from oil and gas to wheat and fertilisers.
For investors looking to take advantage of this, it may seem like the ship has already sailed. The Dow Jones Commodity Index is already up 26.8% so far in 2022 and 49.6% in the past 12 months. Buying now may feel like investing with a strong dose of hindsight bias as a result. But that’s not necessarily the case.
For one, commodities have historically proven a relatively reliable store of value during periods of inflation. And like wars and pandemics, rising prices have a nasty habit of lasting much longer than we expect – as anyone that lived through the 1970s can attest to. The price shock which started in the wake of the 1973 Yom Kippur War saw oil prices rise and remain high until the mid-1980s.
Seeing things in that light, it doesn’t seem unreasonable to believe that we could be entering a period in which many commodities prices remain high for a prolonged period of time. This is not a certain outcome but it’s a plausible one that investors should take seriously.
Some investment trusts specialise in the sector, typically in one area of it. BlackRock World Mining (BRWM), for example, invests in businesses across the metals industry. Others offer access to even more niche opportunities. Geiger Counter is a standout example, as it’s the only trust on the market today that’s focused solely on uranium.
Going all-in on any investment is likely to be a bad idea and a trust that invests solely in commodities is no exception. So even if having some exposure to a trust like BlackRock World Mining might be a good idea at the moment, massively overweighting to it is unlikely to be.
With that in mind, investors that don’t want to think about how much exposure they should have to commodities may want to consider more broadly diversified trusts that could benefit from higher commodities prices, but which don’t invest specifically in the asset class.
BlackRock Latin American (BRLA) may be a suitable choice in this regard. Countries like Brazil and Chile, which the trust invests heavily in, have world-leading companies across the commodities sector. But the trust also has investments in other sectors, like consumer goods and financial services – both of which may offer some protection from inflation.
Undoubtedly some readers skimmed through that last paragraph with some scepticism. Latin America is the region that never misses an opportunity to miss an opportunity for many investors.
There is some historical precedent to think the region will perform well in the near future though. Rising commodities prices and conflict in Europe have benefitted the region massively in the past and we are seeing early signs that this is happening again today. Perhaps this will be the opportunity Latin America doesn’t miss.
Past performance is not a reliable indicator of future results
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