Log inOut with the ‘New’ and in with the ‘Old’ – from Charlie Hancock
In the modern world, the importance of commodities and industrial companies can often be overlooked when incorporating different themes within an investment portfolio. Over the last decade, the rise of technology companies and their popularity amongst investors has driven attention away from ‘old economy’ sectors, such as energy, mining and infrastructure.
Whilst technological innovation will undoubtedly continue changing the way we live at a rapid pace, we will also remain heavily reliant on the industrial sector for many years to come. There is therefore a strong case for having exposure to certain ‘old economy’ sectors within an investment portfolio.
Within the commodities allocation in our portfolios, we have exposure to companies involved in renewable energy projects, but also to mining, oil and gas companies. Whilst renewable energy is likely to continue attracting investment, as organisations and countries attempt to reduce their carbon footprints, we recognise that demand for metals, crude oil and natural gas will remain strong. As an example, in order to build vast numbers of electric vehicles, manufacturers will require significant amounts of copper for wiring circuits and lithium for batteries. The role of mining companies in the transition to net zero should therefore not be overlooked. Those with significant operations in base metals, such as copper, will likely see greater levels of demand than those predominantly involved in mining precious metals such as gold or silver.
The recent surge in wholesale prices for natural gas and electricity highlights our dependence on traditional energy sources. European governments have pivoted away from domestic fossil fuel production in favour of renewable projects, with the continent now heavily reliant on imports of gas and oil. Recent supply side constraints, exacerbated by the pandemic and the conflict between Russia and Ukraine, have sent energy prices to record levels.
Whilst policymakers have good intentions in directing investment into renewable energy projects over fossil fuels, we cannot switch off our need for traditional energy sources overnight. Global oil demand is not expected to peak before 2030 and traditional oil and gas producers therefore still have an important role to play.
We currently have a sizeable allocation to infrastructure funds within our portfolios. The companies operating in this sector include utility providers, railway operators, port and airport owners, as well as pipeline companies responsible for the physical movement of oil and gas. So far this year, the market has recognised the importance of these companies and the sector has performed well as a result. We have covered this topic at length in recent market updates; companies providing goods and services that we need have thrived, whilst those providing non-essentials have struggled.
The charts above demonstrate the shift we have seen in market views. In 2020, investors shunned infrastructure, with the Legal & General Global Infrastructure Index Fund returning -4.63% vs a return of 40.86% for the Legal & General Global Technology Index Fund. The chart for the year to date in 2022 shows the Infrastructure fund delivering a solid return of 15% in comparison to a loss of 16% for the Technology fund.
In the current environment of high inflation and rising interest rates, we think these trends will persist for some time and as a result have limited exposure to the technology sector. We feel that investors overlooking the importance of commodities, industrials and infrastructure in today’s world will be doing so at their peril.