Is push for green tech inviting another commodity supercycle?

There has been a greater near-coordinated push for shifting to green energy in recent years. The year 2020 would be that year that could possibly have created a pivot in the attention of investors other than the environmental activists and even as governments have desired to move in that direction. With the changed administration helming at the US acting with rigor and commitment for this transition, the world has never seen this kind of significance since the Paris agreement about five years ago.

During these years, there was also another underlying consensus being built among the investor community about the ESG investing (Environment, Social and Governance) reaching to its peak contributions last year and continuing. As ESG investing predominantly avoids or provides lesser fund-flows towards polluting industries, there has been a paucity of investments (capex) towards newer oil exploration and mining, etc. Last year's pandemic has only contributed to the worsening of this trend as many of these industries not only suffered funding disruptions but also production issues due to the lockdowns (in some areas very severe and stringent) across the geographies, aiding to supply constraints of all commodities.

Usually, a lower interest rate regime encourages growth in these industries allowing them to expand (capex) and invest in newer finds (mining/exploration) but the general shedding of the investors' curiosity into these sectors has remained discouraging. The lockdowns have also impacted the demand adversely but have seen a quick rebound in the second half of the past year. Sensing this divergence, the equity markets started to discount the possible trends in the middle of last year and hence a quick rally was witnessed in these stocks mostly coinciding with the peak of gold prices. This was also compounded by the debate of inflationary expectations or lack of and for now the latter seems to have won with a vigil till the mid of this year. The synchronized fiscal stimulus and monetary policies by the various governments and central banks have averted the similar fate of the last crisis resembling Great Financial Crisis (GFC) over a decade back which was further intensified with the austerity measures at that time. By the loosening of purse strings by the governments and the aggressive asset purchases by the central banks along with zero or negative interest rates devised a quick rebound in the overall economy. The vaccine approvals and the roll-out has slowly added to the recovery back to the pre-covid levels and even exceeding in some of the parameters. The global industrial production and manufacturing PMI (purchasing managers index of new orders) have marked a two-year high.

The growing trend to go electric and double down on the renewable energy streams would only enhance the demand for non-ferrous metals like silver, copper, cobalt, nickel, lithium, etc. Silver has underperformance in price relative to gold in the last few years but things have changed in 2021 with one of the greatest short squeezes (on the lines of gamestop style) has added to the rally. The increased usage of silver and copper in newer technologies like 5G (5th generation mobile services), EV (electric vehicles), solar panels and persisted demand in electronic markets (in various displays) etc. makes the forecasters bullish into the near future. The other metals mentioned are extensively utilized in the storage technologies (batteries), the trends are suggestive of further accumulations. Even as the world is trying to shed the fossil fuel dependency, oil prices made a smart comeback from a very brief negative intraday rate. This is mostly due to engineered supply restrictions by the producers whereas the world witnessed a sharp economic recovery. The present situation could remain tight with voluntary production cuts by the oil producing nations into the near future.

However, the economics could catch up with shale oil begins their drills, though they've to contend with a less supportive federal government in the US. The current demand is nearing of the all-time-high of 2019 even as the air travel is only a fraction of that same period. As the vaccine rollout gains pace and if the virus variants don't complicate further, oil price would remain high at least in the first half of this year. All the excesses (fiscal & monetary policies) devoted to avoiding a repeat of an earlier crisis could result in a reflationary trend across the globe. While any such reality is a blessing for Japan, the rest of the world will have a tough time, particularly as it moves past the revised comfort zone of the central banks. Also, the declining US Dollar since March 2020 is another prime factor which was attributed for commodity cycles (metals & energy) in the past. The factors that were mentioned here are only confirming a structural deficit in supply of the commodities while a demand upsurge is in progress. So, is the green tech leading to a commodity super cycle, is a moot question. The bottom-line for the investors, is how to take advantage of this evolving situation and if these scenarios take shape. Per their choice, they've options to concentrate purely from the domestic equity, foreign equity and hybrids to take advantage from. Funds like ICICI Pru Commodities Fund or SBI Magnum COMMA fund which predominantly invest in Indian equities that derive businesses from metals, oil & gas and agricultural commodities. The ABSL Commodity Equities Fund is a predominantly invests in foreign equity which is again concentrated towards the agricultural & allied sector.

The DSP NRNE (Natural Resources & New Energy) fund is a hybrid structure where over 70 per cent of the investment is routed to domestic equity which is into ferrous, non-ferrous metals, oil, gas and minerals while about 26 per cent of the allocation is into global energy and sustainable energy through BGF World Energy Fund and BGF Sustainable Energy Fund both part of BlackRock managers. The former fund is more correlated to the oil prices while the latter is more into the newer technologies of which domestic replacements are negligible. Investors could enjoy the flavor of new tech in energy or sustainable energy equities in this fund. The timing of this cycle is critical as inflationary expectations and lower US dollar prices drive these sectors. Hence, an exposure not more than 10 per cent of the portfolio would fit with an active timing strategy for investors.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])