Commodity sector shines as Coca-Cola confirms inflationary pressures Commodity sector shines as Coca-Cola confirms inflationary pressures Commodity sector shines as Coca-Cola confirms inflationary pressures

Commodity sector shines as Coca-Cola confirms inflationary pressures

Equities 8 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Our commodity sector basket is doing great thriving under inflationary pressures building everywhere in the global economy. Until now the market has priced commodities higher and a little bit of inflationary pressures in break-even rates, but equities have mostly dodged the bullet. But Coca-Cola yesterday confirmed that commodity inflation is real and becoming a big threat soon to the bottom line. This is indicator to watch going forward. In today's equity update we also take a look at IBM earnings and talk about which equity theme baskets we are working on.

Our commodity basket, that we introduced in early January in addition to making inflation and the commodity sector our top pick in 2021, continues to perform well up 0.3% in an otherwise difficult trading session for equities overall. The commodity sector basket is up 18% year-to-date with the biggest gains coming from the agricultural and metals & mining stocks. Today, Vale announced a big miss on iron ore production fueling more momentum in the already hot iron ore rally highlighting that inflationary pressures are driven by many production bottlenecks in the global economy.

The best performing stock in the basket is Lynas Rare Earths which is a miner of rare earth minerals which is currently experiencing a renaissance and repricing because the US has made it a strategic objective to reduce the reliance on Chinese production favouring non-Chinese producers. Rare earths minerals are heavily used in the technology sector as thus experiencing increasing demand as the world is hungry for computer chips. China has acknowledged the threat from the US and is urging the world to cooperate on rare earth production.

Source: Bloomberg

Coca-Cola also confirmed yesterday on its Q1 earnings conference call that the commodity environment is challenging the next 12-18 months with the biggest inflationary pressure in commodities such as plastic, aluminum, juice, and coffee. The beverage company said that it can control inflation in 2021, but that next year will be a challenge. As inflationary pressures continue into 2022 it will start a ‘hunger game’ as companies will be forced to choose whether to reduce margins or pass on the rising input costs to the consumer with the risk of losing market share. The companies with market power in their industry are the ones with the greatest strategy flexibility and also why we recently introduced our mega caps theme basket, as these companies have the strongest businesses, best brands, and the largest profit margins. Hence mega caps should also do well during inflationary pressures relative to other companies.

IBM transition to cloud is still in slow-motion

The old technology giant IBM excited investors yesterday with their Q1 earnings pushing the story about its Cloud and Cognitive Software segment seeing double-digit growth rates. However, the segment is still only 31% of the business up from 28% two years ago. The transition for IBM is under way but it is really slow and will continue to put a lid on the company’s valuation metrics which otherwise look quite attractive in a world of low yields. The free cash flow yield is currently around 10% which is quite unusual for this type of business, but also highlighting how much narratives mean for your valuation.

Upcoming equity themes

According to the International Energy Agency (IEA) the world will see a major increase in carbon emissions this year as the world economy rebounds driven by rising coal demand in Asia expected to reach levels not seen since 2014. The world is desperately short on reaching its goal of reaching net zero carbon by 2050 as coal is still the cheapest energy source available when you exclude negative externalities such as air pollution and impact on the climate more generally. As long as, the world does not have a global carbon emission mechanism like the one in the EU, the developing countries will continue to adopt coal for electricity production for many years.

In late March, Reuters had a story on EU moving closer to designate nuclear power as a green energy source thus qualifying for government programmes to deliver the green transformation. Our view is that the world eventually adopts nuclear power again (building out new net generation capacity) and create a renaissance for this efficient energy source. Why is this needed? Because the system costs increase as renewable energy sources increase in weight on the grid, so we need an efficient base load energy source. In the transition natural gas will be used due to low cost and high energy density, but this energy source still emits carbon emissions unless it is combined with the expensive carbon capture storage technology, and thus we believe nuclear power is a natural extension.

As a result, we will soon be launching a nuclear power theme basket to track this industry and the pricing action better. On top of this theme, we are also working on a financial trading theme basket consisting of exchanges, brokers, market makers and financial data firms. We are also working on a Millennials theme basket, but this is a more complex one to do, but fascinating and something that spans many different industries like our green transformation basket. Finally, we are looking at creating a rare earth and semiconductor theme basket.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.