As we enter the second quarter of this year, the question is: what have we learned so far, and what’s ahead?
Well, we are not going to pretend that we know the future.
But there are patterns and events that informed our opinion.
Without further ado, let’s review what happened so far and where things may be headed next.
Trend #1: Soaring Inflation
You are feeling this trend every day. Prices are high and going higher.
Every investor and every consumer is facing the tough choice of how to navigate this and profit from it.
In March, the US Consumer Price Index was 8.5% higher than a year ago.
That’s a lot. To find another instance of such high inflation, you would need to go back decades…
But we don’t foresee this trend stopping. In fact, it may continue or accelerate before things go back to normal.
Investors need to get used to high inflation and do their best to shield themselves against it.
Energy costs are high. This pushes the cost of manufacturing pretty much anything higher as well.
And those costs get passed on to customers.
Energy is still expensive, and it may take the world years to solve this problem.
Supply chains are unreliable, which creates supply bottlenecks.
With restricted supply and high demand for industrial and consumer goods, prices are poised to continue rising.
Trend #2: Political Instability
The war in Ukraine started on February 24th, and there is no end in sight.
It started as a quick offense, but since then, it has transformed into a longer-term offensive.
Facing fierce resistance from the Ukrainian army, the Russian army may be looking at months, if not years, of conflict.
This has already hit the commodities market because both Russia and Ukraine are major suppliers of some of them, such as wheat.
But the economic fallout of this war is much larger, of course.
Russia is now pretty much isolated from the rest of the world because of its actions.
It has lost access to a significant part of its foreign reserves.
The world is watching… And learning.
We will not be surprised to see the “deglobalization” of the world accelerate.
In other words, we expect countries and regions to become more independent from one another.
They will do it to shield themselves and become more self-sustaining.
It is not good for global trade. And it may result in more supply shocks and price spikes.
What to Do?
Inflation has so far pushed commodity prices higher.
Investors who had exposure to them profited immensely.
Bloomberg Commodity Index has been up 34% since the beginning of the year.
For the rest of the year, commodities could benefit from the trends we discussed and another major one: the “green revolution.”
It is a longer-term trend. It will continue unfolding for decades to come.
But it will, in our view, help commodities deliver solid investment returns.
From copper to aluminum, uranium, and nickel, the world needs more “green” metals.
And as the Russian supply of these metals is no longer a certainty, their prices could continue soaring.
Speaking of gold, high inflation has also helped push the price of the “yellow metal” by 9% this year.
Other precious metals, such as silver and platinum, may see investor interest in the remainder of 2022.
Another way to deal with inflation would be to put companies with pricing power on your radar.
They can increase the price of their products in response to higher costs.
And given the fact that many consumers can’t deal with higher prices anymore, looking at discount chains like Dollar Tree may be beneficial. They cater to budget-conscious customers.
Most of all, you should prepare for high volatility. It’s a normal occurrence in a choppy year like this.
Thank you for your loyal readership,
The Financial Star team