IN FOCUS6-8 min read

Podcast - Commodities: a geopolitical hedge in an uncertain world?

Deglobalisation is happening. And commodity security has risen up the political agenda. So, what does this mean for the role of commodities in an investor’s portfolio? 

Mining vehicles


John Mensack
Investment Director, Fixed Income
James Luke
Fund Manager, Metals
Malcolm Melville
Fund Manager, Energy

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You can read the full transcript of the podcast below:

[00:00:07.930] - David Brett

Welcome to the Investor download the podcast about the themes driving markets and the economy now and in the future.

[00:00:21.650] - David Brett

Hello, everyone. Just before we get underway, we used two acronyms in the podcast. The first is IRA, which stands for the Inflation Reduction Act. The IRA was passed into US law in August 2022 by President Joe Biden. It contains $500 billion in new spending and tax breaks that aim to boost clean energy, reduce health care costs and increase tax revenues. We also use the acronym SPR, which stands for Strategic Petroleum Reserve. SPR is the world's largest supply of emergency crude oil. It was established primarily to reduce the impact of disruptions in suppliers of petroleum products and to carry out obligations of the US under the International Energy Programme. Anyway, enough of the admin. John Mensak will again be your host for today, along with fund managers Jim Luke and Malcolm Melville. Their previous podcast about commodities in the age of the 3D reset, the three DS being decarbonization, deglobalization and demographics was out last week, so please give that a listen. We'll add a link in the show notes. Today, they're going to focus specifically on the impact of deglobalization and the role commodities will play in investors portfolios in the new world.

[00:01:42.770] - David Brett

You'll hear first from John, followed by Jim and then Malcolm. Anyway, on with the show.

[00:01:49.240] - John Mensack

So this is a topic we've spent a lot of time talking about internally. And what we're going to ask the listener to do is to set aside the capital markets for a moment, all the things that you necessarily worry about on a daily basis, valuation, liquidity, all of those things and pull back your focus to world events and consider more broadly what's going on. Certainly COVID, rising tensions between the US and China and the war in Ukraine have had many nations and then obviously, companies reconsidering their supply chains and strategic partners. We're going to speak today about the potential to use commodities as a hedge, as a geopolitical hedge, in your portfolio. But before we get to that, let's go back and start at the beginning. And globalisation, that whole term and the rapidity of it really started to ramp up in earnest when China joined the World Trade Organisation in 2001. So, Jim, Malcolm, let's take a look back at globalisation and see, just ask, what did it give us?

[00:02:59.930] - Jim Luke

When I think of that true strong globalising period, particularly the 1990s, and the think of both the macroeconomic impacts as well as the geopolitical backdrop, which was really the Washington consensus and a unipolar world effectively, let's be honest, policed by the United States. So I think from my perspective, actually, what really made a big impression on me in terms of background reading was this notion that between, say, 1980 and 2010 in a globalising marketplace, you saw close to a three-fold increase in the global working age population that could be accessed by a footloose or a cost optimising manufacturer. So the working age population went from about 700 million people in 1980 all the way up to 2 billion people by 2010 via, as you mentioned, the accession of China into the WTO in 2001. But also let's not forget the expansion of the EU in the post Soviet period into the Eastern bloc, a huge source of labour supply into the broad developed economies of Europe as well as increased role of India and the Indian subcontinent. I think what's really interesting about this is that one of the questions we get a lot is well, how do we really think why do we really think that inflation is going to be bullish for commodities?

[00:04:39.760] - Jim Luke

And I think what the globalisation period shows us is that actually that's a period where you have an exception that probably proves the rule because that is one of the periods, particularly in the early 2000s where you saw very, very strong increases in commodity prices but actually developed market inflation, headline inflation was still rather tame. But really what was really happening structurally behind the scenes in terms of labour supply was probably from my perspective, a completely unrepeatable and historically unprecedented increase in the global labour supply which was significantly suppressing labour in the lower deciles of the income spectrum. That's what my takeaways are.

[00:05:22.580] - Malcolm Melville

Yeah, I think for me one of the key tenets of globalisation and it's a phrase you don't hear so much now, was just in time delivery. The focus globally on all corporations was where can we produce on a global basis at the lowest possible cost? Security of supply was not a consideration, it was a minor consideration. And I think the disinflationary impact of that just in time delivery, finding the cheapest place anywhere in the world to produce your goods, not really considering that security of supply was absolutely key to globalisation and clearly the world has changed now and that is under threat. And now security and supply probably ranks alongside cost as a kind of primary driver for when companies are thinking about their production cycles.

[00:06:13.670] - John Mensack

Yeah, you had some crazy stories of the efficiency, right, where you would have a seatbelt for a car which was cut to order in Mexico and shipped up and died in Mexico, shipped up to Canada to be stitched and then brought back into the United States to be installed in the car. So all of those things came our way, low prices and probably for all of us, a lot more being a lot more sanguine, getting closer to major holidays for people and buying gifts and waiting till 72 hours out to make the decision. But things are changing. I guess one of the downsides we had, though on globalisation, certainly in the US we saw it here were fewer union jobs as some of those jobs were shipped overseas.

[00:07:02.870] - Malcolm Melville

Yeah, I think that's right. If you look at the BLS data on union membership in the US, you went from in the 60s it averaged 35% to the 2020s it was down to 10%. So you had a very big change in the structure of labour markets, particularly in the US. But I would say, and if I change Tag slightly here, John, that there were some challenges to globalisation and two kind of key vulnerabilities which I think have been exposed. One is the lack of diversification in supply and the second probably would be the exposure to globalisation. Where you get those stress points is where those relationships with your supply has been weak. And on the diversification element, I think that was really highlighted most vividly in Europe where all the supply of energy, you go to your cheapest supplier because that's what you do, that's your primary motivation was price, it wasn't security supply. And Europe found in itself very tied up with Russia in terms of its energy needs. And the end result was huge spikes in gas prices globally, but particularly centred in Europe. And then that relationship, that key relationships, I think the one area that makes me think of is the US-China axis, where that relationship kind of wax and wanes over time.

[00:08:26.980] - Malcolm Melville

And if you're very reliant on one area for supply, maybe it's chips or whatever it might be, then as those relationships change through time, if that relationship isn't solid, then that adds stress. So the globalisation theme that clearly delivered those lower prices in that era of lower inflation did have it vulnerabilities which have been, I think, exposed over the last few years.

[00:08:51.290] - John Mensack

And given COVID and of course, the other geopolitical challenges, we've started to see a lot of countries try to bring back production of critical materials, critical products, I should say, to either near-shoring or friend-shoring or internally and fiscal, fiscal measures to be able to make that happen.

[00:09:15.650] - John Mensack

On Apple podcasts, Spotify or wherever you get your podcasts, you're listening to the Investor download.

[00:09:25.350] - John Mensack

So flash forward to today and our argument is that we're living through the most significant geopolitical realignment since the fall of the Berlin Wall and before that, probably the end of World War II. So the first thing that you can tease out of that comment, Jim and Malcolm, is that these realignments tend to go for decades. So we're just in the beginning of all of this. And Jim picking up on your theme of moving from that unipolar dominant to more of a multipolar rising environment. Let's break down the three poles as we see them right now and we'll start with the Western powers, obviously the US, Western Europe, Australia. What do they want? What are they trying to achieve here in this world?

[00:10:12.870] - Jim Luke

I think from a US perspective, clearly they want to retain their primacy within traditional spheres of influence, which, let's be honest, includes Asia Pacific. I think more broadly, as we actually discussed on the last podcast, I think governments in Europe and governments in North America in particular, and maybe including Australasia, will be thinking very, very hard about the security of supply chains. I think if the broad assumption is that the direction of travel in US-Chinese relations is not great, and let's hope we're wrong on that, but that does seem to be the direction of travel, then given the reliance for some critical industries on Chinese supply and that goes down to renewables but also in terms of critical minerals and refined production then there needs to be much more attention paid to supply chain security in those areas which to an extent we're already seeing. But you would have to argue that there's a lot more to go. For example, when I speak to consultants who work in the metals industries on specific areas, they will say in private that they think that IRA in the US is pretty much toothless in terms of its ability to really reshape global supply chains as it currently stands.

[00:11:48.990] - Jim Luke

But that's something we can probably talk about a bit more. But there is seriously a lot of potential for disruption, I think.

[00:11:58.500] - John Mensack

Okay. And on the other end of that rope, that tug of war rope, we've got the much strengthened relationship with China, Russia, that sort of friendship without limits, also a marriage of convenience. What do they seek to get from each other in this new world?

[00:12:16.970] - Malcolm Melville

Yeah. What does Russia really want going forward? It's very difficult to say, but there's clearly mutual benefits to both of them, to being, to having closer cooperation. Russia key energy supplier producing 10% of the world's oil at the moment and producing ever increasing amounts of gas, and has direct pipeline access to China. China forever energy hungry and the possibility of getting cheaper energy. Russian oil trades at a 25 $30 discount to international prices. So if China can secure cheap energy from Russia, that clearly is going to help suppress inflation and help their economic growth. So I think it is very much a marriage of convenience. And I think that the other element is that because of Russia's actions in Ukraine and the international reaction to that, Russia has been very much forced into a position where it needs to seek allies wherever it can. And in China, it has a partner who, as I say, is desperate for that cheap energy and therefore really fostering relations there. For Russia has to be on the geopolitical stage, has to be one of the key elements. And I think you could probably add some elements of OPEC into that relationship as well.

[00:13:52.090] - Malcolm Melville

Saudi Arabia and the Middle East clearly need and maintain their strong relationship with the US. But as we discussed in the previous podcast, those ties in the Petrodollar system is probably weakening. And they too also see the strategic benefits of building those partnerships with China. And that cooperation with Russia in the OPEC Plus framework maintains, it continues to be very strong And resilient.

[00:14:19.990] - John Mensack

And to make things even a little bit more difficult. It's not a two dimensional world, it's a three dimensional world. And we have a block of countries now called the Global South, which are sort of southern Asia, some in the Middle East, LATAM, very resource rich countries. They understand this is their moment, do they not, with respect to the major spend I'm sorry, that's going to come on climate change transition, this is their moment. And they're going to flex their muscles, are they not?

[00:14:54.370] - Jim Luke

Well, it certainly puts them in a very strong position, doesn't it, between the competing power blocks of the US, potentially Europe, and then Russia, China. So, in terms of the ability to benefit from the need for resources, particularly if you look at parts of Africa and then obviously Latin America, you would think they'll be doing everything to maximise their own benefits. But also it does put certain parts of that bucket into very difficult positions between the US and China. So to the extent that some of those regions may ultimately be forced to choose which block they align themselves to. So it'll be interesting to see the extent to which you can actually play both sides off against each other, or whether there's more tension that comes from that.

[00:15:48.770] - Malcolm Melville

I think if you were to highlight one big winner in the Global South, it would probably have to be some of the Latin countries, some of the Latin countries, particularly Brazil, where their production of agricultural commodities, they will be, or are the number one producer now of soybeans, they produce huge amounts of wheat, they produce huge amounts of corn, sugar, livestock. So really, they are in an absolutely key position going forward.

[00:16:21.290] - Jim Luke

You've covered these regions for years. What's your take? These are obviously very fluid dynamics.

[00:16:26.810] - John Mensack

It is fluid. The other thing I was going to say, Jim, is that what do the Global South need? They need the machinery to be the most efficient at producing these crops and these metals and so forth. So they need China and the US as well, so this dynamic can change, where they're in a position of power at one moment, and then they're in a position where it'll be interesting to see if there are any. Incentives that are offered by China and the US to provide machinery at rates that are what you would say below market, if you will, in order to curry favour with those countries. So we get asked a lot about, is globalisation dead? I mean, globalisation is not dead, but it just seems to me, Malcolm, Jim, that the players now are coming with distinct uniforms and they're going to be rational economic actors.

[00:17:23.400] - Malcolm Melville

Yeah, I think that's right. We see it in a number of different sectors, probably most clearly in the agricultural sector, where countries are quick to impose tariffs or export restrictions, whether it be Australia and Bali or Argentina on wheat or palm or from Indonesia. Agriculture does seem to be the sector that is most susceptible to that. And I don't think that's going to change going forward, because the government's primary responsibility is always going to be to look after its domestic population. So ensuring food security is absolutely number one priority. And that can have significant implications for agricultural prices at times if you have poor harvests or increases in demand or shifting eating habits, as you're seeing in many parts of Asia and particularly in China.

[00:18:14.050] - John Mensack

So for me, I think the the most prominent story that we've seen so far, and and by the way, so much of this has happened just in the last 18 months, where the tectonic plates are shifting, but you go back to the tanks rolling into Ukraine in February of last year, 2022. In April, 3200 miles away in Mumbai, India, prime Minister Modi famously declared, India will feed the world because they had a phenomenal wheat harvest in a La Nina year, as one would expect with a great monsoon season. And then four weeks later, there was a subsequent pronouncement from Mumbai, India, this time in the form of a press release, and it just simply stated that India was instituting a near total ban, export ban, on wheat. Is this the new normal in terms of just plug in commodity name? Are we to expect much more of this going forward?

[00:19:15.010] - Malcolm Melville

Yeah, I think you should, John. I think food security, commodity security, whether it would be for the energy transition or whether it be agricultural products to depress inflation, is going to be absolutely key and it's front and centre now. I think when you have higher inflation, inflation is coming down, but when you have higher inflation and pressure on governments, high inflation and high food prices and high commodity prices can be very detrimental. You saw that reaction in the US when they tapped the SPR, I think, as a direct result of that spike in gasoline prices. We see. So it can be very costly for governments and governments will do all they can, whether it be export bans or tax relief or tapping reserves to try and cushion those impacts on the population, on the economy.

[00:20:13.570] - John Mensack

And I suppose we should also mention it's certainly not just AG. But if you look at the Chips and Science Act in the United States, blocking China from sophisticated technology and with a claw back provision, where if a partner company takes advantage of the Chips and Science Act, they're banned for ten years from really expanding materially in China. So it just seems like the lines are being drawn here, and both companies and countries are going to have a delicate minuette to kind of dance between the raindrops, if you will, to mix my metaphors. The book on commodities has been certainly they tend to work as an inflationary hedge and they're an asset class you should look at in a time of elevated inflation. And certainly with an ameliorating dollar. But these events that we're talking about with supply chain disruptions, hoarding, food hoarding and critical supply hoarding, they're going to transpire randomly and really be impossible to predict going forward, is that correct?

[00:21:20.890] - Jim Luke

Yeah, I think that's the absolute key to what you're saying. I don't think there's an explicit forecast-ability about any geopolitical shock. I think it's a question of asking is the probability of a geopolitical shock, of a supply disruption, of some kind of supply chain rupture higher given the stresses that we're seeing between, say, the US and China, and more broadly, in terms of this global bifurcation or trifurcation, which you described? I think it's kind of analogous to what we were discussing in the last podcast about the broad macroeconomic background, which is also similar to the extent that the forecast-ability of particular breaking points or particular stress points in the financial system or in risk markets is ultimately unforecastable. But can you say that the potential, the probability of that kind of rupture has increased because of some of the stresses, the fiscal stresses, the debt stresses that we talked about, that probability is higher? I think you can, and I think that it's exactly the same point for geopolitics. John, when we go back and look at the performance of commodities, say, relative to equities, it's very, very clear on that chart that the periods when commodities outperform by hundreds of percent, having in many cases been around geopolitical events, particularly disruptions to Middle Eastern oil supply.

[00:22:55.660] - John Mensack

So past events, the proxy wars, the embargoes, are typically centred on ideology. And of course oil was at the centre of everything and gold was the common hedge. But it just seems now that the potential list of items in scope for this fabric fraying and conflict is actually quite large, given the major spend on metals occurring with climate transition right now.

[00:23:22.450] - Jim Luke

Yeah, I think that's fair. I think the idea if you define a strategic commodity as anything that is essential to the smooth functioning of the economy, then you can broaden the definition of potential commodity beneficiaries of this kind of stress much, much wider than just the gold market from metals into AGS. And obviously energy security is just absolutely vital given how large energy markets are relative to GDP and how large they are relative to other commodity subsectors.

[00:24:02.350] - Announcer

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[00:24:17.870] - John Mensack

With with all this inherent instability, this uncertainty, it just seems to us that what had been a tactical trade of commodities now probably seems to have make a decent case for a structural element in a portfolio for maybe, perhaps at least the next decade. How do you feel about that?

[00:24:41.530] - Malcolm Melville

I think that's right, John. The starting point also is important here. So if you think about a typical portfolio, and I'm not sure what you would say a typical portfolio is really because every investor clearly has their own, their own needs and wants and requirements within a portfolio. But I would say on average an allocation to commodities is low. And that's driven, past three, four years have been very good for commodities, but prior to that, that was a very savage ten year bear market for commodities. And commodities for an asset class, I would say during that ten year bear market generally fell out of favour with many more exciting assets for people to own. Therefore, the starting point for allocation to commodities, or a structural allocation to commodities is very low. We have seen investors periodically over the last three, four years allocate to commodities, but that's very much been a tactical allocation. There hasn't been many people who have said, okay, we really want to take that 5, 10, 15 year view where there are these structural changes going on in the geopolitical landscape and we need to have a structural allocation to commodities. So if your starting point is your allocation to commodities is either zero or very low, then reflect and you believe in these risks, then having some small allocation, two, three, four, 5%, whatever it is, depending on whatever suits the portfolio.

[00:26:07.360] - Malcolm Melville

But having an allocation to a commodity sector that gives you, might give you that protection against some of these geopolitical risks kind of makes sense. If the starting point was that most portfolios had 20% to 25% in commodities, then it'd be a different, very different case. But that just isn't the case. The case is that most portfolios really have none or very low commodity exposure as your starting point.

[00:26:30.910] - John Mensack

It'll be interesting too. You almost wish you could go forward and peek back ten years and see this cyclicality and the tactical nature of commodities, some of that may get ironed out because of what's happening. And as we said before, these events are going to be unpredictable. They're going to occur whether you're in a strong dollar regime or a weak dollar regime, heightened inflation, or a disinflationary period. But it just seems that to not have an allocation in commodities structurally, you're sort of betting on going back to a world which is much smoother, where climate change spend is deemphasized, and that just does not look to be the direction of travel in the world these days.

[00:27:22.910] - Jim Luke

I think that's a really sensible way to think about it, because ultimately that is that as we talked about probability. So the question is for any investor, what kind of world, with what kind of priorities, and what kind of strategic tensions do we think we're going into? And if it's one where priorities remain around climate mitigation, strategic tensions are high and building, then I think the case for having an allocation to commodities is clearly enhanced.

[00:27:53.090] - John Mensack

And I just want to make sure the listener understands. When we look at all of this, we're not explicitly stating that the dollar is going to fall off the table or lose all of its influence, that the US is going to lose all of its influence, or that inflation is going to run very, very hot. But none of those things have to be true for the commodities argument to make sense.

[00:28:18.910] - Malcolm Melville

These changes, they take time, they're kind of glacial. But it comes back to, I think, what we touched upon in the first podcast. We've had this era for the last 30 years, prior to this inflation scare, where inflation was broadly on an average global basis, two, two and a half percent on the global basis for 30 years. The 30 years prior to that, inflation was structurally much higher. And now we had 30 year period where it's low. And if we were moving into a riskier environment, more geopolitical tensions and higher inflation environment, then that is different. These things don't change and you don't flick a switch. We talked in the last podcast about the Petrodollar regime and how that's changing. Those things, they're very slow moving beasts. We're not going to suddenly see Saudi Arabia, suddenly say we don't want a relationship with the US, we're not going to be pricing oil in dollars. Those things don't happen overnight. But over the next 5, 10 years, is that regime likely to change? Yeah, absolutely. And that probably those small changes which you kind of sometimes you don't even see on a week to week or a month to month basis.

[00:29:32.940] - Malcolm Melville

But when you look back in the fullness of time, you suddenly realise, actually we are in a slightly different place than where we were a few years ago.

[00:29:40.860] - John Mensack

Exactly right. And it's a different for an investor in the west, it's just a different feeling and we'll probably get more and more reminders of that as we go forward, geopolitically and just who's selling what to whom and at what price. Okay, so we're going to leave it there then for this podcast. Commodities is a geopolitical hedge. This was a great discussion, Malcolm. Jim, really appreciate it and love having your insights and I'm sure we'll do a check in on this particular podcast as we go forward. Ladies and gentlemen, thanks so much. We hope it was time well spent for you and we look forward to speaking with you on a future podcast.

[00:30:18.970] - David Brett

Well, that was the show. We very much hope you enjoyed it. If you want to find out more, check out our website You can also get in contact with us about anything in the show or ideas for future shows at Please remember to subscribe to us at Apple Podcasts, Spotify, Google or wherever you get your podcasts. And don't forget to leave a review. We're now doing one show a week, which will be available every Thursday from 05:00 p.m. UK time. Thanks very much for listening, but above all, keep safe and go well. Cheers.

[00:30:55.870] - Speaker 6

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John Mensack
Investment Director, Fixed Income
James Luke
Fund Manager, Metals
Malcolm Melville
Fund Manager, Energy


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