One of the best ways to protect a portfolio against stagflation within it’s next few years is to buy commodities, particularly agricultural products, an experienced US-based fund manager said recently.
The idea of trying to shield assets from stagflation – high inflation coupled with low or zero growth – sounds odd at a time when the world is focusing on deflation and falling prices.
But Adam Robinson, director of commodities at Armored Wolf, said the massive amounts of money flooding into the global economy from central banks and governments may have set many stable and unstable economies up for rampant inflation within a couple of years.
“The most likely scenarios are economic recovery and stagflation. In both these scenarios commodities are set to rally,” Robinson told reporters at a recent conference.
Robinson assigns a 30 percent probability to economic recovery and a 60 percent probability to stagflation.
“It’s not going to happen now, but in a couple of years’ time the chances of stagflation are high,” he said.
Many institutional investors seeing inflationary risks have jumped right onto the commodities bandwagon. Assets under management in commodities rose roughly $34 billion to $210 billion in the second quarter of this year, according to figures released by Barclays Capital.
Pension funds have typically used the traditional method of products based on commodity indices such as the S&P GSCI and the Dow Jones-UBS Commodity Indexes.
Gold is normally the first commodity that investors turn to when they are worried about inflation but, historically, all commodities have risen in line with inflation. Indeed, many investors are currently seeking gold purchases.
Buy for 2011 delivery
Robinson recommends investors to buy futures contracts that promise to deliver commodities in 2011, mainly because that is when stagflation will take hold in many countries across the globe.
“Some of my pure inflation trades go out to the second half of 2011… commodities like meat and agricultural products work better,” Robinson went on to say.
Demand for solid commodities such as livestock and grains is relatively inelastic as people have to eat, whether economic growth is strong or weak. It is this reliance that keeps their price steady.
For metals such as aluminium, where inventories are currently at record levels – around 4.4 million tonnes in London Metal Exchange (LME) warehouses – demand is mostly reliant on economic activity.
“It doesn’t apply to the same extent in metals,” Robinson said. “No one feels any pressure to buy aluminium now or for two years out because there is so much already in storage.”
In the energy market, Robinson thinks it makes sense to buy crude oil because it is a supply driven market and to a large extent depends on the decisions of the Organisation of the Petroleum Exporting Countries (OPEC).
“Sell refined products such as gasoline because end user demand will remain weak.
