While commodity assets and related exchange traded funds have been among the most hated investments, the outlook for the asset class could turn around during a rising interest rate environment.
Tim Strauts, senior market research analyst for Morningstar, argues that real assets, like commodities, typically outperform other asset classes during periods of restrictive monetary policy, or when the Federal Reserve enacts a tight monetary policy defined by an increasing discount rate and rising Federal funds rate.
Meanwhile, Strauts points out that stocks are among the worst performers during a restrictive monetary policy.
Specifically, looking at asset class performance from February 1972 through April 2015, commodities have generated an average negative performance during periods when the Fed followed an easy-money policy. In contrast, during restrictive periods, commodities and gold assets outperformed real estate investment trusts, U.S. stocks and international stocks, according to Morningstar data.
“Commodities and gold perform best in a restrictive period and worst during an expansive period,” Strauts said. “Commodities have underperformed for the last three years, but we may be moving into a period of rising interest rates. If that happens, commodities may break out of their performance slump and start outperforming other asset classes again.”
Strauts argues that it is prudent to allocate to real assets like commodities as a restrictive monetary policy is likely to occur over the next few months to few years. [Is it Time to Buy Commodities?]