The red-hot commodity market is being underappreciated in the long term by investors still obsessed with stocks, JPMorgan says

Lucas Jackson/Reuters

  • Commodity prices have soared in recent months, but investors obsessed with the stock market don't seem to care, according to a Wednesday note from JPMorgan.
  • Global investors only have 0.6% of their portfolios allocated to commodities excluding gold, below the average weighting.
  • If inflation continues to surprise to the upside, commodities will serve as a useful hedge for investors, JPMorgan said.
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Commodity prices have been surging in recent months as pent-up demand from consumers amid a reopened economy, combined with supply chain imbalances, created a perfect storm.

With inflation on the rise, investors should look to increase their commodity exposure as a hedge, according to a Wednesday note from JPMorgan.

Lumber prices have more than tripled in the past year as demand for housing and home renovations soar and Canada restricts the supply of timber from its forests. Oil prices have been on the move higher as demand for fuel jumps and a cyber attack cutoff one of the biggest pipelines in the US. And copper prices have more than doubled thanks to increased demand for it in electric vehicles and the supply chain failing to keep up.

This dynamic, in combination with easy year-over-year comparables, led the consumer prices index to surge 4.2% in April, representing its strongest reading in 13-years.

Despite the surge in inflation and the recent rise in commodities, JPMorgan found that investor allocation to the commodity ex-gold space stands at just 0.6%. That's below its post-2009 average, and well-below the near-1% levels it stood at from 2010 to 2013.

At the same time, investors can't seem to get enough of stocks, with equities allocations surging past its post-2008 average in recent months, according to JPMorgan.

"Investors are currently underweight commodities in global portfolios," the bank said. This sets up equities to be more vulnerable than commodities from a positioning perspective.

Read more: 'If lumber crashes, stocks might be next': An award-winning portfolio manager who's tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

"Not only do commodities ex-gold look less vulnerable in the longer-term from a positioning point of view relative to the near-term, but they also look a lot less vulnerable relative to the equity asset class," JPMorgan explained.

And if inflation continues to surprise to the upside in the coming months, commodities relative attractiveness in the long-term "becomes even stronger given investors' perception of commodities as [a] better inflation hedge," the JPMorgan concluded.


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