Transcript:
Caroline Woods
Commodities are back in focus as inflation and geopolitical tensions linger. But recent moves in oil have been anything but straightforward. So for investors looking at this space right now, is this a real opportunity or just more volatility? Hakan Kaya is senior portfolio manager at Neuberger Berman. Joins us now. Hakan, great to have you.
Hakan Kaya
Thank you very much. Thanks for having me.
Caroline Woods
So this is an ETF spotlight. The fund is the Neuberger Commodity Strategy ETF ticker NBC. Com. We’ll get to that in just a minute. But first make the case for commodities right now. Why should investors be paying attention.
Hakan Kaya
I think you know it’s very simple. We’re in a different regime right now. What is new in this regime is inflation. Your stocks, your bonds, anything that’s stuck in these guys, bonds in these guys, they are all impacted by this inflation. Anything that’s cash flow discounting debt will get this similar treatment. Your rates your teams they are all in the same basket.
Hakan Kaya
So what you need is something that’s not cash flow discounting. It’s pricing what is going on right now and commodities that’s it. There are spot assets. They don’t think about future they give you what is this what the scarcity is right now. And I think, you know, in a way kind of like they are filling in the gap for that missing diversification you are having in the stocks and bonds.
Hakan Kaya
I think you will need more of these type of, you know, store of value assets, inflation hedging assets. I think they will reduce your portfolio volatility. They will reduce your, you know, macro economic sensitivity in your portfolio, very much required in these times okay.
Caroline Woods
So let’s take a step back. When we say commodities what do you actually mean energy metals AG. And where are you seeing the strongest opportunities today.
Hakan Kaya
Of course yeah. When I see commodities this is across the board. You know, anything tangible that you can touch from oil to, to base metals to precious metals to, you know, food and livestock, you know, across the board, we, we would think that you can find opportunities. Of course, today, the energy is in the under spotlight, you know, very expensive, very volatile.
Hakan Kaya
I think going forward, you can see some spillover effects from energy to the rest of the space. You can see, you know, base metals getting impacted through again, you know, Strait of Hormuz, not much aluminum is coming out again, coming from Strait of Hormuz actually not coming. You know, sulfur that is going to impact copper production in the months ahead.
Hakan Kaya
Again, kind of not coming out of Strait of Hormuz. We have a fertilizer issue. And these are going to create problems for the next crop cycle in wheat in corn and soybeans. So across the board we see either energy inflation or food inflation or, you know, again, you know, livestock inflation. We will just need to get ready for paying more for those beef that we really like to grill during the summer.
Caroline Woods
Yeah. Commodities though have been a tough trade for long stretches. And as you pointed out, we have seen that pull back really sharply from recent highs in oil. It’s still up significantly this year. How should investors be thinking about risk? Because I’ve had guests come on and they’ve said you don’t invest in commodities. You trade commodities.
Hakan Kaya
What I think certainly true. You know, commodities, if you look at them individually, they are very volatile and it’s idiosyncratic to its nature. You know, there is no escape from that volatility. But when you look at them as a basket, a basket of commodities, the natural, correlation between them significantly reduce that volatility and make the asset class very investable.
Hakan Kaya
As a matter of fact, when you look at a commodity basket or commodity portfolio, it’s overall volatility is lower than your Nasdaq stocks. You you know, perhaps it’s sometimes lower than your S&P 500. So that correlation between the the the unrelated commodities, they really make the portfolio look safer. So in this age, you know, you, you, you know, in these times, you see kind of like energy in the spotlight, very volatile.
Hakan Kaya
And to be honest, the implied volatility of energy is around 100% right now. It just looks like a binary bad. So rather than just, you know, focusing on your attention in just one sector or a few commodities, you know, I think it may be a better, you know, you mentioned policy to diversify, do some risk diversification, do some risk budgeting, risk budgeting, you know, away from the already impacted energy commodities to those things that are older also, you know, proxy bads, but they’re they’re also cheap and less volatile.
Hakan Kaya
We it’s right to prefer this risk diversification. We think you know we’ve seen the ups in energy. But potentially we see these spillover effects in the rest of the space, especially in base metals. And then, you know, agricultural. And towards the end of the year, we will continue to see the impacts in the precious metals when we start thinking about those debasement rates, when we need to pay for that, you know, expenses of the defense spending or through the war or kind of like the, the, the, the inflationary aspects that we are seeing from the fiscal, you know, profligacy and kind of like the printing.
Caroline Woods
So let’s talk about the Commodity Strategy ETF, where your biggest exposure is in the fund right now.
Hakan Kaya
So we are currently, you know, at par with energy and trying to balance that with, you know, allocations into precious metals and, and base metals. Again, you know, our understanding is, you know, we can escalate or de-escalate from here if we are going to escalate. We were going, you see, escalation. We were going to see the upside from our energy positions.
Hakan Kaya
But if we go into a de-escalation, you know, regime from here, it makes sense to have those commodities that got cheaper in the past few weeks or a month, things like gold, silver, platinum, palladium or copper, you know, aluminum or nickel and zinc to be kind of like present in the portfolio to get benefit from these relief rallies.
Hakan Kaya
And get benefit from this, you know, potential, potential kind of like, back into, you know, growth type of environments. Remember prior to the, the crisis we were in that era of, you know, you know, the world economy is in an easing mode. You know, 90% of the GDP is a monetary easing conditions. And also on top of that, we have the fiscal expansion not only in the United States, but also across the globe.
Hakan Kaya
So we can quickly go back into pricing that are, particular regime and unit. You know, again, you know, base metals, you need the precious metals to be able to, to gain exposure to that regime. So, yes, we are, you know, balancing the risks between energy upside and potential and de-escalation patterns from here.
Caroline Woods
Where do commodities fit in a portfolio? What’s a meaningful allocation for an everyday investor that actually will move the needle?
Hakan Kaya
Yeah, certainly. I think, you know, look, commodities are not traditional assets. A lot of people may have some aversion to including this asset class in their portfolios, you know, add tracking errors to their portfolios. But I think this tracking air is very much, in my opinion, will be, need it in, in portfolios. So our understanding is if you can stomach about, you know, two, 2.5% tracking error to your typical, you know, 60, 40 portfolio, you know, a typical allocation, I think, you know, that that kind of like translates into 5 to 10%, you know, commodity allocations in, in, in traditional portfolios.
Hakan Kaya
And you know, with that you going to have to think about, for example, what it can do in your portfolio that kind of allocation and in these kind of like years already commodities up. Yeah. As of today, you know, 20, 25% in years like 2022 when your stocks and bonds are declining in two handles, commodities are going up in, you know, 30 and 40%.
Hakan Kaya
So you really can have ability to buffer those, those those periods where stocks and bonds, they join on the downside. But, you know, commodities, they bring up this and convex of. So you don’t want to overwhelm your portfolio with commodities because they don’t produce yield or they don’t produce, you know, income. But you also don’t want to put too little because then you don’t see that again, you know, it doesn’t move the needle.
Hakan Kaya
And we think it about, you know, 5 to 10% allocation or, you know, a range between them is is a happy medium. And these times are times when you would like to be on the closer to the upper, end of that range.
Caroline Woods
I was taking a look at your fund. It’s already up about 25% year to date. So for investors thinking well I don’t already have commodity exposure in my portfolio, am I too late. What’s your response.
Hakan Kaya
Look I think like I said we are going into a new regime. You know, we would like to call this regime identified with six disruptive. These you have divestment in the asset class. You know, the money is not going into the energy companies, you know, the miners and the food producers because of the poor returns from the previous era.
Hakan Kaya
You have the decarbonization not necessarily to solve for the, you know, climate risks, but again, for, you know, self sufficiency or energy diversification needs. You have the, the, the you know, data center demand. Now it’s again a space race to get the computational dominance across the world. And for that, you need to build these data centers very quickly.
Hakan Kaya
You know, hyperscalers will hyperscale and that will require a lot of demand for things like aluminum, copper, grid building and also, you know, LNG and natural gas for fueling these, you need to, you know, de-risk your supply chains in this era of globalization, you know, go up from those just in time inventory management to just in case inventory management in.
Hakan Kaya
And then you need to do a lot of stockpiling so that de-risking is going to be important. On top of that, you need this, this you know, I understand this a dollarization digitization regime where you can see kind of like the dollar is, is self getting weaponized in foreign policy. And central banks are not blind to this fact anymore.
Hakan Kaya
And buying more and more of those neutral assets, for resource management and not in gets for example, more neutral than gold and finally, defense is going to create a lot of, demand in this regime for commodities, you know, new, new era in, in wars. Right. You need to, you know, build these ballistic missiles, drones and battleships.
Hakan Kaya
These are, again, very metals, severely commodity, but unfortunately not very efficient for the economies. They are going to be inflationary so seeks disruptive these from divestment to defense I think it’s a new era. This is something new that we started living in. And that’s going to create what I believe is a a tailwind for the commodities, but not unfortunately, they will be ahead in for the traditional assets like stocks and bonds.
Hakan Kaya
So commodities will play a very important role in kind of like completing this asset allocation puzzle. And I think they will be indispensable.
Caroline Woods
Okay, I have two final questions, but we’re almost out of time, so we have to keep it quick. One of our viewers actually pointed out yesterday, you know, that we keep hearing about potential shortages tied to the I build out specifically power, natural gas, copper, even things like helium. If that starts to pressure margins for companies, does that actually strengthen the case for owning the commodities instead of the stocks?
Caroline Woods
Or why should I own the commodity as opposed to the stock that might be associated with the commodity?
Hakan Kaya
Sure. Yeah, definitely. I think look, this, if I is going to hit the wall, it’s going to be a supply wall, a supply wall through kind of like coming from this copper build out or, you know, data center build out through, you know, you need the steel and aluminum and then the fuel that’s required to, you know, power these things.
Hakan Kaya
So it cannot you cannot, you know, take commodities away from an AI trade. And then in my opinion, they seem like an cheaper way of proxy. I bet. And instead of buying, you know, these hyperscalers, it multiples that you know too many people doesn’t and makes sense. You know, in order for that to happen, you gotta have to, you know, see an increase in the demand for these metals and which are currently cheap at bargain prices, almost.
Hakan Kaya
So it’s better to get exposure or, you know, and other alternative exposure through metals and commodities themselves as well. But I would like to refrain from kind of recommending going out and buying the miners or the, you know, the producers themselves. Because, you know, when you look at these, you know, mining companies, you when you look at the natural resource companies, they are still equities.
Hakan Kaya
They have market data and they are correlated with the underlying, you know, whether it’s your S&P 500 or MSCI AG. So you’re not getting the true benefit of and diversification there. You know market correlations are high when you look at their underlying pure commodity beat us. Or the you know what you get if you know let’s say copper prices increase 10%.
Hakan Kaya
How much is your miners, going to increase. That data is very low. In the case of energy, for example, it’s you know, every 10% increase in oil price reflects 3% increase in your sectors in spider energy and similarly in metals and mining. The only difference is in the gold miners. It’s a decent exception. But again, instead of going out and, you know, trying to select the best gold miner out there, get your precious metals through a gold futures contract and targeted at the volatility that you and your comfortability and taking as an investment.
Hakan Kaya
So it’s a lot more efficient is a better, bang for the buck in terms of, you know, doing capital allocation. So and then you don’t have to deal with whether your companies are hedging their production books and then capping the upside. So underlying pure commodities are better. Way to go. Best if execution, you know, option in my opinion.
Hakan Kaya
And that’s what I think. You know, we would like to, prefer when, you know, creating a broad basket commodity to, to deal with the inflationary issues that we are facing these days.
Caroline Woods
Okay. So to wrap, we don’t typically do our rapid fire segment for ETF spotlights. But I have one rapid fire question for you. So it’s just a 2 to 3 word response here. Bottom line should investors be adding commodities right now or wait for a pullback.
Hakan Kaya
I think they should. Dollar cost average. You know I don’t rate headline to headline. It’s not a good, you know, investment policy. You know increase your allocations gradually. That is been a better working you know, policy for us. And I’ve seen academically as well. So you know patience speed see you know timing, you know, just be patient and gradually increase allocations from here.
Caroline Woods
We’ll leave it there. Hakan Zaya Senior Portfolio Manager, Neuberger Berman, thank you so much. Really appreciate you shedding some light on this space.
Hakan Kaya
Thank you very much. And, pleasure being with you today. Okay.
Caroline Woods
If you’re interested in how data is driving investment decisions right now, check out our recent ETF spotlight on quant strategies and what the models are signaling in this market.
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