By Nick Hedley
BlackRock, the world’s largest asset manager, says that despite recession risks, there are opportunities for investors in commodities as the transition to clean energy gains momentum.
In its midyear outlook, the asset manager says the “great moderation” – a prolonged period of steady growth and inflation, combined with a bull market for equities and bonds – is now over.
In the short term, BlackRock says, increasingly politicized central banks are tightening policy too aggressively given that inflation is being driven by spending shifts and production constraints, rather than excessive demand.
“We ultimately expect central banks to live with inflation, but only after stalling growth. The result? Persistent inflation amid sharp and short swings in economic activity,” the firm says in a report co-authored by its vice chairman, Philipp Hildebrand.
Nevertheless, a recession would likely be shallow, and there are opportunities for investors in structural trends – particularly the energy transition.
“Although current policy isn’t sufficient to achieve net zero by 2050, we think the transition could accelerate as tech develops, societal preferences shift, and the human and economic cost of climate change becomes clearer,” BlackRock says.
Markets have not yet fully priced in the transition, which will boost the valuations of companies that are better prepared for it. These include “already green” companies, carbon-intensive firms with credible decarbonization plans, and companies that supply the materials, equipment and services needed for the transition.
“Commodities are a prime example: Demand for some transition-critical minerals is expected to grow quickly,” BlackRock says.
Minerals needed in the transition include lithium, cobalt, copper, and nickel.
Olivia Markham, natural resources portfolio manager at BlackRock Fundamental Equity, said: “Going green and electrifying the power base will be incredibly metals intensive.”
Commodities markets are already tight, partly because producers have underinvested in recent years, Markham said on a webinar.
Thanks to improved capital discipline in the sector, commodities companies will be able to weather the volatile environment ahead and could continue to outperform on a relative basis, she said.
BlackRock added that investors “should start positioning for net zero.”
“We believe investors can be bullish on both fossil fuels and sustainable assets, as we see a key role for commodities in the transition. Yet our work finds that changing societal preferences can give sustainable assets a return advantage.”
BlackRock’s assets under management crossed the $10 trillion mark in the final quarter of 2021.