Commodities

In December, the UBS Constant Maturity Commodity Index (CMCI) delivered total returns of around 0.3%, bringing the 4Q22 performance to 8.4% and the 2022 performance to 17%. Commodities have been the best-performing asset class for two years in a row now. Sector wise, energy lost the most ground in December, down by 3.4% suffering primarily from a drop in US natural gas prices due to milder temperatures. In contrast, a weaker US dollar made precious metals the best performing sector, up by 5.3%. The other three sectors—industrial metals, agriculture and livestock —were up by 1.5–3.2% in December. During 4Q, all the sectors contributed positively to performance. In 2022, the energy sector was the clear standout, surging 36–38% in 2022. Agriculture finished second with less than half of that performance. Base metals, on the other hand, delivered negative returns as China’s economy faltered. Due to the war in Ukraine and higher US interest rates, precious metal prices swung over the year but finished largely flat.

Outlook: We see another strong year for commodities in 2023, and forecast high-teen percentage total returns on an asset class level. We expect energy to take the top spot again, followed by industrial and precious metals respectively. Precious metals such as gold look attractive from a portfolio insurance perspective, while agriculture and livestock should deliver flat to positive returns on a full-year basis. Our positive view for 2023 is based on a robust economic recovery in China, the start of a Fed rate-cutting cycle later in the year, and several unresolved supply-side issues that should keep market balances tight.