UBS Says Commodities Can Diversify Portfolios as Inflation and Geopolitical Risks Mount

Commodities could take on a larger role in diversified portfolios as investors face renewed inflation pressures, geopolitical volatility, and steady structural demand for energy and industrial materials, according to UBS, which contends that broad commodity exposure can deliver both diversification and new sources of return.

Although gold has become a favored hedge in portfolios, UBS suggests investors ought to look past the conventional safe-haven asset.

Commodities offer access to segments of the global economy frequently underrepresented in domestic equity markets, and may also help portfolios endure shocks that negatively impact stocks and bonds.

The growing case for commodities

UBS said the rationale for broader commodity exposure has grown on multiple fronts. Gold climbed approximately 10% in August, giving investors with sizable gains a chance to take profits and shift into other commodity sectors.

Meanwhile, fresh hostilities in the Middle East have heightened the possibility of energy-supply interruptions, and demand for oil that is running above expectations could underpin crude exposure in the longer run.

Industrial metals, too, benefit from structural tailwinds, including electrification, growing electricity needs, and investment in artificial-intelligence infrastructure. UBS noted that these sources of demand are expanding even as supply in many commodity markets is failing to keep pace.

The diversification argument stands out. UBS examined developed-market equities and commodities and discovered that their correlation has declined over both rolling three- and six-month windows during the past year. In essence, commodities have more often risen when equities decline, which could help soften portfolio losses in turbulent markets.

Determining the right allocation

The UBS Chief Investment Office presently recommends a mid- to high-single-digit percentage allocation to commodities in a diversified portfolio, asserting that such a level offers substantial diversification without assuming undue risk.

The optimal weighting varies with an investor’s goals, risk appetite, and market view, and periodic rebalancing is essential as circumstances evolve.

Gold continues to serve as a strategic diversifier, in UBS’s view, buoyed by central-bank purchases, ongoing moves to reduce reliance on the U.S. dollar, and worries about global debt. The bank stays positive on gold for the coming 12 months, yet suggests that investors holding large gains might contemplate rotating some of that exposure into other commodities.

The flip side is volatility. UBS pointed out that commodities generally thrive when supply-demand imbalances or macroeconomic dangers like inflation and geopolitical upheaval are pronounced, which implies that returns can swing markedly as those factors shift.

UBS highlighted that broad European equity benchmarks, including the MSCI EMU, dedicate only about 8% of their weight to energy and materials, whereas financials represent approximately 25% of the index’s market cap.