UBS turns bullish on industrial metals as structural commodity tailwinds build

Investing.com -- UBS has turned more bullish on industrial metals, upgrading the sector to Overweight as it argues structural forces will support commodity prices over the coming years.

"We increase industrial metals to overweight," the bank's strategists wrote, pointing to a steady rise in emerging market demand, global efforts to reach net-zero emissions, climate change and structural underinvestment across almost every sector.

More broadly, UBS said it expects commodities "to deliver strong diversification benefits for traditional bond/equity portfolios" over the medium term, with both macroeconomic conditions and market-based signals remaining supportive.

“The recent pullback in base metals prices offers an opportunity to increase exposure,” the strategists wrote. Constrained supply and supportive structural demand should provide a floor for prices and underpin a recovery over the coming quarters.”

Still, the bank cautioned that prices are unlikely to rise in a straight line, and recommended an actively managed approach built on three pillars.

First, it advised investors to dynamically adjust their overall exposure to the asset class in response to the shifting macroeconomic landscape and broad price trends.

Second, it favored a differentiated sector approach to capture distinct dynamics across individual commodities.

Third, it suggested enhancing returns on cash collateral by replacing money-market securities with a higher-yielding portfolio.

UBS said that with such an active strategy, investors could navigate commodity markets more effectively and significantly improve the risk-adjusted returns of a broad commodity allocation versus a more passive approach.

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