Industrial metals like copper
are the “clear winners” of an environment in which inflation is
rising, according to Citi strategists.
Worries about inflation in the US are said to be partly
responsible for the recent selloff in the stock
Citi recommends buying the Bloomberg Industrial
Metals Sub-index, which consists of futures contracts on zinc,
aluminum, copper, and nickel.
Industrial metals like aluminum and copper offer the best
opportunity to profit from a rising inflation environment,
according to Citi.
Concerns about inflation became full-blown on Friday, when the
jobs report showed the fastest rise in average hourly
earnings since 2008. This was a catalyst for the sell-off that
was amplified by a sudden
spike in volatility, as investors realized that the Federal
Reserve may soon have to cool an inflation threat by raising
We’re now reckoning with the end of the so-called Goldilocks
environment — a period characterized by stable growth, low
volatility, low inflation, and low interest rates — according to
Jeremy Hale, the head of asset allocation and global macro at
“One asset class stands out as a clear winner under the
assumptions of reflationary macro backdrop,” Hale said.
“Commodities outperform on both absolute annualized returns and a
Sharpe ratio basis relative to all other fixed income and equity
Instead of picking individual commodities, Hale recommended
buying the Bloomberg Industrial Metals Sub-index, based on its
price of 133.37 at 3:21 a.m. ET Thursday. The sub-index consists
of futures contracts on zinc, aluminum, copper, and nickel.
Inflation benefits industrial metals because their prices rise
alongside the cost of production for companies that rely on them,
The jobs report wasn’t the only sign of higher inflation, even if
it was one of the tipping points for the recent
stock-market decline. For example, Hale noted that the
Institute of Supply Management’s index of prices that
manufacturers pay for raw materials is at its highest level since
“What the last days have certainly shown us is that we have
probably moved out of the low vol QE driven world,” Hale said.
“And especially if we do move into a reflation phase (higher
growth, higher inflation) then expect risk-asset Sharpe ratios to
be worse. This could improve conditions for macro traders.”
Hale said the risk of this recommendation is if China, one of the
world’s largest consumers of metals, experiences a growth