Commodities – Feature
The relationship between the prices of raw commodities and those of finished goods is weak and is getting weaker.
George Calhoun, Stevens Institute of Technology
modities, it is coming from technology, it is coming from soft- ware, design, brands, equity and other intangible assets,” he adds.
There is data available to back up his claim. During the past 10 years, commodity prices of timber, steel and gas have shown a negative correlation to the consumer price index (CPI) index. However, this is a trend that is particularly pronounced in developed markets. Price levels in emerging markets are much more susceptible to commodity price rallies. For example, food accounts for a quarter of the Turkish and Brazilian CPI indexes, 36% in Russia and 40% in India, according to CaixaBank. Nevertheless, when it comes to developed markets, Calhoun is convinced that long-term deflationary trends, such as demo- graphic changes and the growing share of technology in pro- duction, will prevail.
In the long run
Does this mean that institutional investors, who are in it for the long run, should ditch inflationary concerns? For most institutional investors, managing the portfolio impact of rising price levels remains a key concern.
And while inflation indices such as the CPI or retail price (RPI) index have come under fire for their inaccuracy to reflect the cost of living across the country, they still make an impact on the calculation of pension scheme liabilities. The PPF’s Evan Guppy believes inflation is here to stay, at least for the medium term. “The derivatives market is currently pricing that RPI inflation will peak at around 11% in May. In contrast to earlier in the year, it now looks as though the energy price cap could rise again in October meaning that headline inflation will be slower to fall
from that level and will remain at elevated levels until we get into 2023.” This is also a growing concern for Brian Kilpatrick, chief investment officer of HSBC’s pension scheme. “I am very, very worried about inflation. Our defined benefit assets are well hedged against inflation and interest rate risks,” he says. “That means inflation does not really impact our funding levels. “It does, of course, impact members when inflation is higher than in the past. But the biggest impact will be on the value of assets in defined benefit and defined contribution more broadly.
“While equities tend to perform well in a moderate inflationary environment, the big worry is stagflation and defaults coming out of this environment,” Kilpatrick adds. Paradoxically, while commodities have been seen as a tradi- tional inflation hedge, demand for commodity funds has been limited. Over the past month, commodity ETFs across Europe continued to book net outflows, according to Lipper’s monthly ETF report.
While commodity hedge funds have benefited from riding the wave of volatility, pension fund investors show little appetite to invest in the asset class with the volatility making them unap- pealing. “We have been in a lot of discussions with our trustees about the outlook of the inflationary environment and what it means for the assets we are invested in,” Kilpatrick says. “That is one of the reasons why we are thinking about investing in illiquids because they tend to be one of the assets that provide inflation-linked cashflows.”
While equities tend to perform well in a moderate inflationary environment, the big worry is stagflation and defaults coming out of this environment.
Brian Kilpatrick, HSBC Pension Scheme
Issue 113 | May 2022 | portfolio institutional | 37
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60
