Before the pandemic, demand for raw materials was under deflationary pressure. Commodity stocks underperformed the market. It was not a local problem; the situation was the same all over the world. This is clear from the Purchasing Managers’ Index (PMI) of industrial production which fell for a few quarters, reflecting weak demand. Due to the decline in demand on the commodity front, companies have avoided investing in the commodities space.
The pandemic has forced governments to reassess their fiscal policies. Governments emphasize local manufacturing. Monetary stimulus programs have been announced to support the economy, and the main beneficiaries will be commodities. Fiscal stimulus and direct bank transfers will improve demand in the future. Companies have also realized the need to realign their supply chains. In such a context, thematic commodity funds deserve a tactical asset allocation from investors.
However, thematic commodity funds are not for everyone. Being cyclical, the commodity space is very volatile. There is a lot of noise and it takes experience and expertise to understand such backgrounds. In the past, people burned their fingers investing in wealthy valuations or invested in companies that lacked financial discipline. Investing in thematic commodities funds can be very rewarding for those who are willing to take additional risks.
An investor should take a close look at valuations while investing in thematic funds. There can be a lot of noise in the industry, it is important to invest wisely. Ideally, when investing in thematic commodities funds, one should consult a qualified financial advisor to avoid making the wrong decisions.
Now is the time to invest in thematic commodity funds? Yes, after a long period of falling inflation, the government’s expansionary fiscal policies coupled with de-globalization efforts hold promise for companies involved in the commodities space. The government’s determination to revive the economic engine and realign the supply chain will benefit commodity companies for years to come. The demand scenario is expected to improve and this translates into an opportunity for savvy investors.
How much do thematic commodity funds deserve in asset allocation? It depends on the investor’s risk appetite. For someone nearing retirement, these funds may not be a good idea, but for someone who is young, these funds represent a great opportunity. Ideally, 7 to 10% of your portfolio should be allocated to thematic commodity funds.
Remember that investing in thematic funds is a game of patience. Regardless of what happens in the economy, one should stick to their investments. Due to the volatile nature of these funds, it is appropriate to invest via SIP. This way, they will be able to withstand the impact of volatility.
Finally, while you can have a longer life and take additional risks, thematic commodity funds offer excellent opportunities for capital appreciation and deserve a place in your portfolio. However, these funds are more suitable for sophisticated investors and not for newcomers. For someone who does not understand the intricacies of the commodities space, investments should only be made after consulting a qualified financial advisor.
The author, Abhinav Angirish, is the founder of Investonline.in. Opinions expressed are personal