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What's the trend of commodities in 2022?

In August 2020, on Warren Buffett's 90th birthday, Berkshire announced had invested 6,000 million dollars in 5 Japanese trading companies, namely$( ITOCHU)$, $(MARUBENI)$, $(MITSUBISHI)$,$( Mitsui & Co)$., and $(Sumitomo Corporation)$ ($(SUMITOMO)$).

In Japan, these companies are more akin to investment banks or private equity firms, the Japanese companies that trade with a wide range of products and materials. At that time, Buffett’s cost take 5% of the total five companies shares.

In August 2021, as commodity prices surged, the combined value of Berkshire's holdings in these five companies increased by about $2 billion, a return of more than 30%, which did not account for Incoming dividend income.

In 2022, commodities such as energy, metals, and crops have surged as supply constraints and geopolitical tensions, coupled with a rebound in demand, have led Buffett's Japanese companies to be the biggest winners of commodity rallies.

The world's major commodity price indices have all hit record highs in 2021. Earlier, investment bank Morgan Stanley believed that "commodities will continue to outperform stocks in 2022."

Four Reasons are as follow：

1. Morgan Stanley believes the reopening of the economy will support a pickup in demand. In total, governments around the world have announced around $11 trillion in spending measures and another around $6 trillion in liquidity support, which together accounts for about 18% of global GDP, potentially creating above-trend commodity demand.

2. Morgan Stanley believes investors' allocation to commodities remains well below historical averages. Since inflation is unlikely to be as subdued over the next decade as it has been in the past decade, the need for inflation hedges will continue to support commodities.

3. Morgan Stanley believes the energy transition has created huge new demand, especially for metals. The energy transition has also created significant uncertainty about the outlook for oil and gas demand, potentially limiting supply for years to come, leaving both markets under constant strain.

4. Morgan Stanley believes Geopolitical events have a larger impact on commodity supply, and while such events tend to be bad for stocks, they tend to boost commodity prices.

Besides Morgan Stanley, the world's number one hedge fund Bridgewater executives also said that commodities are the most underutilized hedging tools.

Bridgewater Fund chief investment officer Karen Karniol-Tambour said last Wednesday： As the economy expands and prices rise, commodities are the most underused investment tool to hedge against inflation.

However, some analysts believe that in 2022, under the background that the global epidemic has not yet been fully controlled, the IMF lowered its forecast for global economic growth, and the Fed's attitude changed from "dove" to "eagle", especially the upcoming interest rate hike in March Policy could put downward pressure on commodities, or make it difficult for commodities to replicate the 2021 bull run.

Therefore, investors need to be highly vigilant of the risk of a significant correction in commodity prices and avoid encountering a situation where high prices take over. At the same time, the uncertainties of international geopolitics and the epidemic have also added many variables to the trend of commodities.

Related Reading:

Value investing A cornerstone of Buffett's investing philosophy, Buffett at his 91, is the only one of the world's top ten richest people to have seen his net worth increase through 2022. King of Value Investing: Buffett is The Only One Assets Grows Among Top 10 Richest Men