Investors betting that U.S. inflation will ease once the Iran conflict ends and energy prices fall may be badly miscalculating their exposure to risk.
A powerful El Niño weather pattern is expected to pick up where geopolitical disruptions leave off, threatening to drive global commodity prices significantly higher in the months ahead.
Analysts at Marex, a financial-services company specializing in energy and other commodities, warn that the phenomenon tends to raise global food commodity prices by up to 9%.
El Niño is the warm phase of the El Niño-Southern Oscillation climate pattern in the tropical Pacific Ocean, causing flooding and droughts across much of the world.
The National Oceanic and Atmospheric Administration puts the odds of an El Niño this year at more than 90%, with a 1 in 4 chance it will be extremely powerful.
Weather forecaster Joe Bastardi at WeatherBELL Analytics said changes in air pressure in the central and western Pacific suggest the El Niño has already started.
Chris Faulkner-MacDonagh, a portfolio manager on T. Rowe Price’s global multiasset team, said “The El Niño is going to be very bad this year, and there are spots in the United States already suffering from a drought.”
Faulkner-MacDonagh also notes that the real inflation problem is not rising food and energy prices themselves, but rather the absence of disinflation pulling prices back down.
“Disinflationary pressures are as low as during the 1970s,” he said, adding that the U.S. economy is “positioned perfectly for an inflation storm.”
China cutting manufacturing capacity to support prices has further reduced disinflationary pressure in the global economy, compounding the inflationary outlook.
Faulkner-MacDonagh expects inflation to continue rising before settling at a level above where it currently stands, and says a surge into the 8% to 9% range over 12 months would not be surprising.
Investors looking to protect purchasing power may consider commodity-focused funds, including the Harbor Commodity All-Weather Strategy exchange-traded fund, which has produced 21% annualized gains over the past three years according to Morningstar Direct.
That compares favorably to the 16.1% return for its broad-basket commodities category and its benchmark Bloomberg commodity total-return index over the same period.
The $3 billion ETF rebalances its portfolio quarterly based on where management believes the highest inflation will occur, giving it a dynamic edge against shifting price pressures.
First Eagle Investments portfolio manager Benjamin Bahr singles out Canada-based Nutrien, the world’s largest fertilizer company, as a compelling agricultural-sector play in this environment.
Real estate investment trusts also offer inflation protection, with American Assets Trust (AAT) standing out due to strong insider buying from founder and executive chair Ernest Rady.
Rady recently purchased $10 million worth of AAT stock at prices up to $23.59 a share, a signal that management has strong conviction in the company’s value at current levels.
American Assets Trust owns a diversified mix of retail, office, multifamily and mixed-use properties across California, Washington, Oregon, Texas and Hawaii.
With inflationary forces converging from geopolitical uncertainty, climate disruption and weak disinflationary pressure, investors who fail to reposition now may face a painful reckoning ahead.
