Portfolios need to be
‘ARMMD’ for the future
Bifurcation — a move from unipolarity to bipolarity or even multipolarity — is creating new competing major power blocs and altering the existing world and economic order. The spillover from this transformation is broad, including the reconfiguration of global trade, especially for critical commodities.
Commodity prices have historically exhibited multiyear cycles. However, in recent history, these cycles occurred within two waves of globalization. The first wave of globalization was triggered by the post-WWII new world order period, and the third wave at the start of this century as China entered the World Trade Organization. According to a recent World Bank report, Global Economic Prospects – January 2022, “On average (over the past five decades), from peak to peak, cycles lasted almost six years.” Indeed, the past five decades have been an era of intense waves of globalization. However, as the world undergoes this transformation into apparent major power blocs, globalization is being transformed, likely extending the commodity price cycle considerably.
Last year we highlighted our concerns about reconfiguring the global world order and globalization. We argued that globalization is transforming into what we like to call “gated globalization.” This form of globalization is primarily directed by security concerns, not efficiency (cost and time). Thus, we expect higher prices and the current commodity price cycle to be in place for an extended period.
Moreover, a bifurcated world will trigger more significant concerns about national economic security. We expect national economic security strategies to broaden and the deployment of such strategies to accelerate in a world that is forming clear major power blocs. This will accelerate and expand national economic security strategies, encompassing all parts of the economy deemed of “national economic security” interest. Agriculture, renewable energy, critical minerals, and metals are universally understood as being of “national economic security” interests. Undoubtedly, not all countries have the ingredients for independence and self-sufficiency on critical commodities. Therefore, nations will have to compete for critical supplies, helping to keep a favorable price cycle in place.
In addition to the forces of power blocs and gated globalization, we are also incorporating the implications of climate events, which are predicted to occur at a greater frequency. Climate events and changing weather patterns can significantly disrupt the production and supply of critical commodities, whether it is due to drought, floods, fires, or other events. Finally, global climate agendas also contribute to the upward price pressure on commodities, minerals, and metals that are critical for achieving agreed-upon climate targets.
In this historical transformational period, we have introduced a new investment strategy focused on agriculture, renewable energy, minerals, metals, and defense, ARMM(D)1. This strategy, we expect, will allow portfolios to benefit from a bifurcated, gated globalization new economic world order.2
See our asset class views.
1 ARMM or ARMMD? At GMG, we continue to avoid asset allocation to the defense sector whenever possible. Defense remains on our GMG Exclusion list. However, some firms are reconsidering the Defense sector and removing it from their exclusions lists.
2 It must be noted that while allocation is not a question of market timing in our assessment above, a prudent investor must always consider pricing, market positioning, sentiment, technical and other factors when initiating an allocation of an asset into portfolios. Prudent investors often tend to “leg in” and make allocations piecemeal regardless of conviction.
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