If you've been thinking about upping your exposure to ASX commodity shares, the time may have arrived.
That's according to Eleanor Creagh, Australian market strategist for online trading and investment specialist Saxo Bank.
Writing in Saxo's Q2 2021 Quarterly Outlook for global share markets (released late this afternoon), Creagh says, "Digitisation and disruption are colliding with a physical world that cannot keep up. From semiconductor chips to copper, demand is on the rise while capacity remains constrained."
How the pandemic is driving global shortages
Creagh says that global markets are experiencing an "everything bubble". One where "the COVID-induced abandonment of the status quo renders a shortage of just about anything in the real world".
She points out that the pandemic gripping the world today is far from the first to supercharge innovation. From the Great Depression of the early 1930s through to the SARS epidemic in 2003, global crises "have become defining moments in sowing the seeds of innovation and defining consumer behaviour".
And the coronavirus, as we've witnessed, has already driven many years of change in just a few months.
Central banks hand over the policy baton
On a macro level, the biggest shift we may be seeing is governments stepping in with fiscal policies (government spending programs), replacing the major role central banks have historically played.
According to Creagh, developed nations' "excessive reliance on monetary policy [have been] perpetuating an economic system that no longer serves the majority".
She says that a massive rise in inequality, exacerbated by the pandemic, has seen most billionaires prosper while the man on the street has done it tough. While this trend was already in play before COVID struck, the pandemic has accelerated and exposed a growing inequality rift that she labels unsustainable.
We are now experiencing a seismic shift toward a policy regime that was previously unthinkable, where even in the age of extraordinary monetary intervention, central banks have transformed from the heroes to bystanders as fiscal primacy takes the reins…
[T]he role of government and public policy is being redefined as a new social contract is established inside the constraints of the planet's carbon budget.
Why you need a more inflation resilient ASX portfolio
Inflation, long "stubbornly absent", appears set to make a comeback.
Creagh writes that the latest pandemic relief bill in the United States will boost the average income of the poorest quintile of households by 20%, "generating an increased capacity to consume for those with the highest marginal propensity to do so".
She adds:
[I]t is not hard to see these transfers being inflationary… higher spending and transfers to the individual will bring a lasting step-up in consumption; until inflation becomes a problem, why stop the cheques?
We can all relate to the concept of pent-up demand. Getting the vaccine so we can get out of our homes, out of our states and spend some of that money we'd normally have been splashing out travelling, shopping and dining out.
Indeed, Creagh says, with consumers eager to spend, "inflation is coming to a price index near you. Transfers have bolstered incomes, the labour market is rebounding, savings are elevated, and US household spending expectations are at a 4-year high."
She adds, "Bigger government and bigger fiscal change, aimed at sustainable growth and job creation where money printing is aimed at demand generation, is inherently more inflationary."
YIMBY!
You're probably more familiar with the acronym NIMBY than YIMBY. YIMBY stands for 'yes in my back yard'. Meaning, bring on the local development.
While that doesn't mean every Aussie will be cheering on a new subdivision in their town or elevated freeway in their backyard, Australia – like most of the developed world – is looking to revitalise its ability to provide essential goods and services domestically.
You need look no further than Anthony Albanese and the Labor party's latest pronouncement to see how big of a shift this is. Labor has just proposed splashing out $15 billion to bring back Australian car manufacturing.
Again, the pandemic has supercharged this trend.
According to Creagh:
The crisis marked a boiling point for the 'my nation first' impulse (just look at vaccine diplomacy) and with it, the shift to local over global. Moving forward, companies and nations will focus on reshoring critical areas and adding resilience and self-sufficiency to supply chains via localisation and enhanced regional ties, as well as bidding to secure supply, restore jobs and manage production tail risks.
She adds:
[T]he pandemic has now accelerated the move on a global scale, including the shift away from China (eg, rare earths). The race for technological supremacy is also spurred by the pandemic's acceleration of digital adoption…
From semiconductor chips to copper, demand is on the rise while capacity remains constrained. We have underinvested in the production capacity required to meet accelerated digital adoption, green transformation, and the recovered spending capacity that comes with a seismic fiscal shift.
What's an ASX investor to do?
If inflation is at our doorstep, as Creagh forecasts, ASX investors will want to ensure their portfolio is more inflation resilient than perhaps it has been during these past low inflationary years.
Creagh says:
A strengthening growth outlook and rising inflationary pressures are supportive of commodity-heavy indices, small caps, cyclicals, and real economy stocks, but are difficult for multiple highflyers and speculative bubble stocks to navigate. The capacity to shift market leadership has moved toward real economy stocks, non-US markets and commodities…
The allocation to commodities and commodity producers must be higher. A hedge against inflation but also positioning for tailwinds of supply constraints and price-inelastic demand, and green transformation.
Fortunately, there is no shortage of commodity shares on the ASX, from microcap explorers to blue chip producers trading on the S&P/ASX 200 Index (ASX: XJO).
And don't forget about the potential of so-called soft commodities, ASX agriculture shares.
