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Few sectors demonstrate just how volatile investing can be than resources – especially so far this year. Several commodities have experienced huge price swings in recent months, including oil and gas, base metals like copper and zinc, as well as lumber and potash.

“It’s been quite a ride for investors in the commodities sector,” says Doug Porter, chief economist and managing director at Bank of Montreal in Toronto.

“It’s definitely a more volatile sector than most others,” he adds, but notes that’s not necessarily a negative.

Commodities can act differently than other investments, Mr. Porter says, serving the role of “important diversifiers in a portfolio.”

That’s been the case in Canada, where the S&P/TSX Composite Index has seen less of a drop than the broad-based U.S. indexes year to date, due in part to our higher concentration of commodity names, which have mostly outperformed.

Globe Advisor spoke with Mr. Porter recently about his take on the commodities landscape and how advisors might want to approach the sector on behalf of their clients.

How do you characterize the year so far in commodities?

It’s been a tale of two worlds for commodities over the past six months or so. At the start of the year, they demonstrated a strong argument for why commodities have an important place in a portfolio. Then, the volatility of the past few months [and price drops in certain sectors] showed why a typical investor might want to shy away from them.

There are different stories about why some commodities have faded. For industrial metals, it’s because of global growth concerns. The more recent pandemic shutdowns in China have also hit metals demand. There’s also a lot going on in the agricultural sector, initially related to Russia’s invasion of Ukraine and, more recently, related to extreme weather in the U.S. and Europe. There are also different stories within energy as natural gas remains very strong, yet oil has been trading lower in recent months and is below pre-invasion levels.

What’s your outlook for this sector?

Commodities were seen broadly as a reasonable inflation hedge, partly because of their past performance. But I’d be cautious about making that recommendation in the near future.

Rising commodity prices have led to some bursts of inflation in the past. But the medicine now being used to cure inflation – higher interest rates – could hurt commodity prices, especially if that medicine works and undercuts global growth. Hopefully, central banks won’t have to go so far as to push the global economy into a downturn, but it’s a clear risk. The weaker the global economy, the worse it gets for commodities.

Of course, not every commodity is in danger. There will be a lot of separation among commodities in the coming year. But overall, I’d be cautious on commodity prices, generally, when central banks are on the inflation warpath.

What’s a common misunderstanding about investing in commodities that advisors should communicate to clients?

There are certainly times when investing in commodities makes sense, and those episodes can last years, but you have to be laser-focused on the cycle because conditions can change very quickly. Just as you can have years of them being on an upswing, you can have decades of a downturn. We’ve certainly seen that in recent history. So, you need to be able to tolerate long periods of underperformance.

Investors should also understand that they might have indirect commodity exposure through certain securities, such as railways stocks, which do better when commodity demand is strong [and vice versa]. It means ensuring you don’t have more exposure to commodities than you’re comfortable with.

This interview has been edited and condensed.

– Brenda Bouw, special to The Globe and Mail

Must-reads from Globe Advisor this week

Why high-risk, high-reward biotech may be poised for a bull run

A “buy when there’s blood in the streets” moment may be at hand for beaten-up biotechnology stocks, potentially poised for an upswing after several months of falling prices, according to experts. For decades, biotech has been a boom/bust segment offering soaring returns during bull markets while destroying capital in bear markets, and this most recent bear market is no exception. Joel Schlesinger reports on the historical perspective and what that means for opportunities in the space now.

What a declining number of advisors means for the investment industry

It has been common knowledge in the investment industry in the past few years that the average age of financial advisors is well over 50, but demographics are only part of the reason why the overall number of advisors looks set to decline. A combination of demographics, technology and lack of succession planning are leading to a wave of consolidation that will leave larger books of business in the hands of fewer advisors. Jameson Berkow looks at what this means for the future of the industry and clients.

How post-secondary students and their families can save on taxes

Tax planning is one important aspect of back-to-school preparations that can typically go overlooked for families that have children who are students in post-secondary institutions. Many students usually face big education bills and have limited work income, leading some to believe it might not be worth it to file a tax return when, in reality, experts say the opposite couldn’t be more true. Michelle Zadikian explores strategies such as taking advantage of the federal tuition tax credit and mapping out registered education saving plan withdrawals as ways to be tax efficient.

Why prenups are no longer just for the wealthy

Hope for the best, but always be prepared for the worst. That’s the advice one financial advisor gives to clients who are going to walk down the aisle – especially as it pertains to their finances. Prenuptial agreements have entered the mainstream as an important part of financial planning, in part because drafting them has become more affordable. Barbara Balfour looks at how clients can prepare for the scenario of their marriage failing.

Also see:

Financial services firms ease teams back to the office with hybrid work

Wealth management firms work toward creating mentorships for women advisors

Three ways advisors can win over a new generation of investors

Anti-ESG ETF gets off to a roaring start

Hedge funds race to bet on outcome of ethereum ‘Merge’

What you and your clients need to know

TD taps Cowen for new co-heads of investment banking and global markets

Toronto-Dominion Bank has set out how it will make room for executives from Cowen Inc. after its acquisition of the New York-based investment bank is completed next year, tapping two senior figures to be co-heads of major divisions alongside current TD leaders. The investment banking unit will be led by Cowen co-president Larry Wieseneck and Tim Wiggan, who moves from his role as co-head of global markets, according to an internal memo by TD Securities chief executive officer Riaz Ahmed. The other current co-head of global markets, Chris Vogel, will stay put. He will be joined by Cowen’s other co-president, Dan Charney. Clare O’Hara and James Bradshaw give details on the management change.

ESG backlash weighs on sustainable investing in Canada

The flow of investor money into sustainable funds in Canada has slowed to a trickle, as the environmental, social and governance (ESG) space globally faces intense scrutiny from investors and regulators. Canadian exchange-traded funds with an ESG tilt saw net inflows of just $3-million in August, after taking in an average of close to $400-million a month through the first half of the year, according to data from National Bank of Canada. It’s the latest sign that the credibility and performance issues swirling around the industry could be catching up with the Canadian ESG space. Tim Shufelt looks at what this means for the sector.

Ray Dalio expects stocks to fall 20 per cent if rates rise to 4.5 per cent

Billionaire Ray Dalio, founder of one of the world’s biggest hedge funds, has predicted a sharp plunge in stock markets as the U.S. Federal Reserve raises interest rates aggressively to tame inflation. “I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent negative impact on equity prices,” the Bridgewater Associates’ founder wrote in a LinkedIn post. Mr. Dalio’s bearish view further ignites concerns about valuations in U.S. stocks. See what this means for private sector credit growth and clients’ spending.

- Globe Advisor Staff