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An increasingly uncertain economic outlook may prompt some investors to shun assets that typically exhibit high volatility. Instead of buying commodity stocks, for example, they may purchase high-quality bonds or even hold cash in an era where the IMF forecasts that global economic growth will decelerate from 6pc last year to just 2.7pc next year.
The problem with this strategy, though, is that the long-term returns from typically stable assets can drastically lag behind their more volatile peers. This can be seen in Questor’s Wealth Preserver portfolio, where our four commodity holdings have generated far higher returns than any other asset class.
Their average total return since being purchased 16 months ago is 24pc, albeit with elevated levels of volatility along the way, while cash has returned 2pc and our four bond holdings have gained just 1pc on average.
Buying volatile investments that offer higher long-term return potential is even more important during an era of extreme inflation. A low single-digit annual return on bonds or cash may seem like a price worth paying for stability and peace of mind. But it equates to a substantial negative after-inflation return from which it is exceptionally difficult to recover in future years.
Indeed, commodities offer a stunning long-term growth outlook that makes them an ideal means of overcoming rampant inflation. In many cases, commodity firms such as this column’s holdings in Antofagasta, Yellow Cake and Sociedad Quimica y Minera de Chile (SQM) focus on future-facing commodities that are likely to be in high demand as the world aims to achieve net zero.
Antofagasta, for example, is likely to benefit from high and growing demand for copper. Electric vehicles and renewable infrastructure use many times more copper than their fossil fuel counterparts, for instance. Similarly, SQM is set to capitalise on growing demand for lithium as the world transitions to electric vehicles.
A greater focus on energy security and net zero ambitions means Yellow Cake’s financial future is bright as uranium demand increases. And since aluminium is used extensively in renewable infrastructure, our exchange-traded commodity (ETC) holding in WisdomTree Aluminium could generate positive returns in the coming years.
The performances of all four holdings are, of course, correlated to the economic outlook. As a result, their share prices are set to remain relatively volatile over the short run as a likely economic slowdown takes place.
However, they offer long-term capital return potential that is likely to remain in excess of inflation. As a result, investors should fight their natural urge to seek stability and instead buy commodity stocks if they are aiming to maintain, and even grow, the value of their portfolio on an after-inflation basis.
Questor says: hold
Ticker: ANTO
Share price at close: £14.58
Update: gold
The price of gold has also been highly volatile this year. After surging to over $2,000 (£1,620) per ounce in the first quarter, it subsequently fell to around $1,600 per ounce in the third quarter as rapidly rising US interest rates made income-producing assets relatively attractive.
Tighter US monetary policy has also strengthened the dollar and made gold more expensive for non-US based investors, thereby moderating demand for the precious metal.
However, gold’s long history as a store of wealth during periods of high inflation and defensive attributes in times of economic turmoil have supported its price over recent months. Indeed, it has produced a 14pc gain for our Wealth Preserver portfolio since being added in April last year.
In Questor’s view, gold’s appeal is likely to increase over the coming months as the full impact of fast-paced monetary policy tightening on the economy’s growth rate begins to take hold.
In addition, a likely moderation in the speed of interest rate rises over the medium term, albeit with surprises along the way, could increase demand for the precious metal as the rising relative appeal of income-producing assets gradually fades.
Therefore, gold remains a key portfolio holding that is likely to offer worthwhile inflation protection over the long run.
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