Overview

A structural commodity bear market ended with the aftermath of COVID and a new structural bull phase has begun:

• Commodity supercycles are typically sparked by a sustained and unexpected demand shock and prolonged by slow-moving supply responses.
• Extending Bank of Canada's quantitative methodology, which documents four commodity supercycles since 1899, through the present day shows evidence of the beginning of a new bull phase that began in 2020.
• A number of recent fundamental developments are also analogous to events of past supercycles.

Executive Summary

Structural bull and bear cycles in commodity markets are often sustained for a decade or more. We believe a structural bear phase in commodities ended with the onset of the COVID-19 pandemic and its aftermath and a new structural bull phase has now begun.

The structural commodity bear market that occurred during the 2010s was brutal, but relatively short by historical standards. Research by the Bank of Canada (BoC) documents the existence, nature and causes of commodity supercycles. There have been four distinct supercycles since 1899, lasting 30 years on average, each with a well-defined bull and bear phase. These cycles, which are much longer than economic cycles, are typically sparked by a sustained and unexpected demand shock and prolonged by slowmoving supply responses. The bull phase of these cycles also tends to coincide with rapid industrialization in a significant part of the global economy.

We extended the BoC's quantitative methodology of analyzing and dating supercycles by an additional six years to today and found evidence for the beginning of a new bull phase that began in 2020. We also identified a number of recent fundamental developments that are analogous to events of past supercycles:

1. Massive fiscal and monetary policy stimulus in response to the pandemic drove a significant positive global demand shock.
2. Decarbonization and the global transition to green sources of energy will require massive amounts of new green infrastructure requiring significant raw material inputs, a process akin to a global re-industrialization.
3. Increased geopolitical tension and lessons learned from the pandemic are leading to a reorganization of global supply chains, which will require commodity-intensive capital spending.
4. On the supply side, chronic underinvestment in commodity production during the past decade due to sharply falling prices, environmental policies and the rise of ESG investing, and investor demand for capital discipline have meant that commodity production is likely to satisfy only a portion of expected demand in the coming years.
5. The Russia-Ukraine conflict is an amplifier of the trend toward commodity scarcity (by removing Russian and hampering Ukrainian supply) and increased commodity demand (increased military spending from NATO's European member).

We believe we are in a higher-inflation regime that will be sustained for the balance of the decade and commodity prices have exhibited historical strength during higher-inflation environments. Commodities also become more powerful diversifiers to equities during higher-inflation regimes while bonds become less powerful diversifiers.

Given our view that we are in the early stages of a commodity structural bull phase and a higher-inflation regime, we believe commodities and commodity-related assets will likely exhibit strong relative performance over the next several years. Therefore, we think there is a solid case to include/increase strategic exposure to commodities in investor portfolios in the current environment.