The commodity sector and the reflation trade in 2021

Our commodity sector basket aims to provide a list of broad exposure to the global commodity sector. The basket comprises of 40 stocks across four categories such as agriculture, chemicals, energy, and metals & mining. We have for the most part chosen the largest companies in each category but have had to deviate a bit from that principle to get a diversified basket of stocks. We also aimed at diversifying across different regions of the world to avoid getting a high concentration in a specific country.

Source: Bloomberg and Saxo Group

The interesting part of investing in the commodity sector through equities is that it provides investor with exposure to productivity gains, automatic handling of rolling in commodities and provides a leveraged play on reflation.

The performance of the basket is shown below against the MSCI World Index in USD. Since inception on 1 January 2016 the portfolio is up 171% including dividends compared to MSCI World up 83% during the same period. In terms of relative outperformance our commodity sector basket has delivered around 90% relative outperformance with almost 70%-points of the outperformance coming from the period January 2016 to June 2018. This corresponds well with the period of rapidly rising inflation according to the NY Fed Underlying Inflation Gauge highlighted in the beginning. If we are right about rising inflation the commodity sector in general should see increased revenue growth and higher profitability combined with higher valuation multiples.

The key risks in our commodity sector basket are of course a rising USD, lower inflation, and lower economic growth in China. Especially, the last risk source is the most important one as China’s manufacturing sector drives demand for chemicals and metals, and China’s growing wealth drives demand for agriculture and energy.

Introducing themes

Themes incapsulate the equity market in a better way than the traditional country and sector indices due to the more correlated equity markets as a function of globalization. Therefore, we will spend more time on equity themes going forward and our commodity sector basket above is the first step. We will progressively throughout the year introduce more themes and regularly follow up on performance across our podcast and regular analyses.