The commodities supercycle has arrived. How can investors get involved? : Taosha Wang

Commodities supercycles have the power to reshape market trends for many years, even decades. We appear to be back in one, as the Iran War has amplified a number of long-term bullish tendencies. Many investors are now asking how to engage in the supercycle, rather than whether they should. Oil recorded its biggest monthly gain ever following the U.S. and Israeli strike on Iran in February. Add to that the substantial gains in copper and gold since mid-2025, and the race to find energy, metals, and minerals to fuel the artificial-intelligence arms race. A commodities supercycle is underway.

Commodities supercycles are long, powerful waves that are driven by major structural changes. Think of the oil booms of 1970s or the urbanisation boom of China in the early 2000s.

How can investors participate?

Commodities tend to be treated as one asset class. However, a bullish market does not always occur in the same way across all of them. Leadership tends to change. Rotation within an asset class is as important as the overall direction.

As an example, while a geopolitical event may immediately lift the oil price, copper and gold prices may fall or even lag as investors reduce their crowded positions, or reassess risks to growth.

In 2022, energy prices spiked following Russia's invasion in Ukraine. Meanwhile, some industrial metals fell as concerns about recession grew.

We're seeing such divergence again today.

After the Iran War began, oil prices soared by 64% as energy supplies were squeezed. This acted as a hedge for portfolios against volatility in equity markets. Gold fell by 12% in March, its worst month since 2008. This was largely due to the fact that it had been inflated for months by heavy speculative purchases and was among the few liquid assets that investors could sell when margin calls were made.

What are the most important things that investors need to keep in mind when they're considering riding the latest commodity waves?

Small Pool, Big Waves

Investors should first remember that even small changes in the allocation of commodities can have a "massive" impact on prices.

Commodities play a huge role in the real economy but are not as important for investors as stocks and bonds. Energy and materials account for less than 6% of S&P 500 compared to more than 30% in the case of the "Magnificent 7" tech giants.

The price is determined by the margin. Even if a small amount of capital is moved from broad equities and bonds to commodities, whether via physical exposure or listed options, the price impact could be significant. A small market will only absorb so much new capital before prices adjust.

Another key issue is interconnectedness: the movement of one commodity can change the outlook for other commodities.

Many commodities are interconnected through the potential substitution of demand or as raw materials. High natural gas prices, for example, can increase oil consumption. Increasing energy costs affect the price of food, fuel and fertiliser. In some industrial applications, copper and aluminium are interchangeable.

Inventories are another factor to consider. While firms may value cost-efficiency in a situation where supply is not constrained, geopolitical events can lead to a shift towards higher inventories.

Iran is a good example. The ability of Tehran to block the Strait of Hormuz, which is a choke point for energy and other goods, has highlighted how vulnerable these products are.

In the future, both governments and businesses will likely place a higher priority on the security of supply for many goods. This will lead to a greater stock of strategic materials. This could lead to a structural premium for the entire complex.

STOCKS OR BARRELS?

Next, you will need to decide whether or not you want to own the commodities themselves or related equities.

Commodity-related stocks are affected by many factors. These include the hedging policies of each company, their capital allocation decisions and pipelines of projects, as well as their position within the commodity value chain.

Take the energy industry. Consider the energy industry.

Not all producers upstream benefit in the same way, of course.

The U.S. has not suffered any direct damage during the current conflict. Due to their different geological profiles and production techniques, these producers have greater flexibility in adjusting the rate of production.

Many U.S. companies were also well-adapted to the price regime that existed before the Iran war, which was roughly $70 a barrel. This allowed them to generate a healthy cash flow. The windfall at current prices could be significant.

Energy companies, no matter where in the world they are located, also have their own unique?risks relating to management, debt, long-term strategy concerns, and other issues. These issues do not need to be considered when investing directly in commodities.

Positive Convexity

Investors should also not overlook the positive convexity of commodity return profiles. The price upside is usually much greater than the downside.

The physical nature of commodities and their direct link to the productive activities necessary to keep an economy humming are at the root of this.

Investors can short sell or delay the purchase of financial assets when they rise in price.

It is rare that the same logic applies to tangible commodities where it's difficult to delay or reduce consumption quickly. Prices may increase and eventually cause demand destruction, but not quickly enough to avoid a sudden squeeze.

This asymmetry can be one of the reasons commodity cycles can become more powerful than investors expected once they have taken hold. Understanding this can make the difference between being in a good position for a commodity cycle or being run over by one.

The views expressed are the author's. Taosha is the portfolio manager at Fidelity and creator of "Thematically thinking" newsletter. This column is a favorite of yours? Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)