The Case for Commodities

Diversification is widely regarded as an investor’s first line of defense against shifts in a particular asset class. The principle is straightforward: Equities provide growth, bonds offer stability and together they help portfolios weather different market environments.

However, that relationship can be tested during periods of geopolitical stress, such as the current conflict in Iran. That’s when adding commodities to a portfolio could enhance resilience. A diversified basket of raw materials—not limited to oil— can respond to global economic and geopolitical developments in ways that differ meaningfully from traditional assets.

When Stocks and Bonds Fall in Tandem

Under typical conditions, economic growth is often accompanied by modest inflation. In such scenarios, equities tend to perform well while bonds may weaken. But as recent events show, geopolitical shocks can disrupt this dynamic.

As tensions in Iran escalated, markets quickly focused on the risk of energy supply disruptions and higher oil prices. Elevated oil prices can drive inflation upward while simultaneously dampening economic growth—a combination commonly referred to as stagflation. As a result, both equity and bond prices declined in unison, eroding the protective role fixed income has typically played in a diversified portfolio. For investors relying solely on stocks and bonds, this presents a significant challenge: When both struggle simultaneously, a portfolio’s primary source of balance is compromised.

Commodities offer a distinct contrast. As the raw materials that underpin the global economy, their prices are driven by factors such as supply disruptions, geopolitical tensions and shifts in real economic demand. Commodities often respond positively to the same shocks that can weigh on stock and bond performance.

Why Commodities Can Work in Investors’ Favor

Stocks are claims on future earnings, while bonds are claims on nominal cash flows. Both tend to be more vulnerable when inflation is higher and growth is lower. Commodities, by contrast, tend to reprice upward when scarcity becomes a dominant concern, and that may work in to investors’ advantage.

In this sense, commodities may carry a positive geopolitical risk premium. Investors are effectively compensated for holding assets that tend to appreciate when the global environment becomes more constrained, uncertain or fragile.

Investing in a Broad Mix of Commodities

Importantly, the case for commodities is not about concentrating the portfolio’s exposure in oil. in fact, it’s the opposite.

Geopolitical events are inherently unpredictable, making it difficult to anticipate which segment of the commodity market will be most affected. One episode may center on crude oil and refined products. Another may hit agricultural products due to disruptions in key regions. And yet another may move industrial metals through sanctions, shipping bottlenecks or power shortages.

From Feb. 28, when the conflict in Iran started, to March 31, a typical portfolio with 60% of stocks and 40% of bonds would have posted a loss of 3.6%. Including only a modest 5% allocation to commodities, the portfolio’s performance would have improved to a gain of nearly 1%.

During that same period, a diversified basket of commodities including oil, metals and agriculture products advanced 13.5%.

We believe a broad basket of commodities helps provide more robust diversification by increasing the likelihood of capturing the impact of the next shock— regardless of where it emerges.

The bottom line for investors focused on long-term portfolio resilience is not to replace stocks or bonds, but to complement them. A modest allocation to a diversified set of commodities may provide exposure to a unique opportunity—one that traditional asset classes alone may not fully capture.