(Bloomberg) -- Investors are eyeing the surge in global commodity prices following Russia's invasion of Ukraine as a way to shore up portfolios struggling with a potential inflation and growth shock.
Pimco has recommended adding commodities to the typical 60/40 strategy as a hedge against spiraling price pressures. The call comes as this strategy, named for the conventional allocations of stocks to bonds in a well-balanced portfolio, heads for its steepest quarterly decline since the initial panic of the pandemic two years ago.
The threat of rapid interest-rate hikes to head off an inflationary surge has weighed on bonds this year even as stocks have slumped. That's a disruption of the typical relationship between these markets, whereby bonds tend to rally as investors seek shelter from sliding equities.
“High and volatile inflation – rather than growth – may be the biggest driver of equity and fixed income returns over the coming year, making commodities a valuable potential hedge to the traditional 60/40 portfolio,” Pimco's portfolio managers Greg Sharenow and Andrew DeWitt wrote in a blog this week.
Commodities have posted stratospheric gains since Russia launched its attack on Ukraine. The Bloomberg Commodity Spot Index is on track for its biggest weekly increase since 1974. Global bonds have lost more than 3% this year, according to a Bloomberg index, while the S&P 500 is down 8.5%. Vaulting prices on everything from oil and metals to agricultural products have added to the effects of supply constraints inflicted by the pandemic, fanning fears of a stagflation scenario, where spiraling costs coincide with a growth downturn.
Read More: Cascading Russia Risks Stir Market Correlations That Can't Last
Commodities Craze
Still, the spike in oil prices may be approaching unsustainable levels. That's given the possibility of an Iran nuclear deal, release of spare capacity from OPEC, increased U.S. shale production or even reduced demand at “sky-high prices,” according to TD Securities' head of commodity strategy Bart Melek.
Oil was off its highs Friday, but found fresh momentum after Ukraine said a nuclear power plant came under attack from Russian shelling.
Schroder Investment Management said it has trimmed some of its commodities exposure into the conflict-driven gains. “We're feeling now that maximum geopolitical risk is priced,” said Sebastian Mullins, deputy head of multi-asset at the money manager in Sydney.
Setting aside the directional views on commodities, however, the need for more backup for investors picking their way through an unstable markets environment is clear.
“I can't see how an investor in a multi-asset portfolio is going to make money buying a German 10-year that's again in negative territory and a U.S. Treasury that's 1.75% or so,” said Stephen Miller, an investment consultant at GSFM, a unit of Canada's CI Financial Corp. He recommends buying low-risk assets that are not correlated with bond and equity beta, such as gold, broader commodity baskets, or inflation-linked bonds.
©2022 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
