UBS: Outlook suggests more balanced risk-reward for commodities

Investing.com -- UBS sees a mixed macroeconomic outlook for commodities but maintains a constructive stance on the asset class over the medium term. 

In its latest note, the bank said it expects commodities to “deliver strong diversification benefits for traditional bond/equity portfolios,” although near-term risks have become more balanced.

“With momentum signals improving lately but macro signals suggesting a mixed picture amid muted manufacturing and upside risks to inflation, the top-down assessment now indicates a more balanced risk-reward,” UBS analysts wrote. 

As a result, the firm has moved its top-down allocation to neutral while keeping sector preferences unchanged.

Over the longer term, UBS remains bullish. “A steady rise in emerging market demand, global efforts to achieve net-zero CO₂ emissions, climate change, and structural underinvestment across almost every sector should support commodity prices over the coming years,” the note said. 

However, UBS cautioned that prices are “unlikely to move higher in a straight line from here.”

UBS recommends an active approach to commodity investing, built around three key pillars: adjusting exposure dynamically to reflect macro trends, using a sector-specific strategy to exploit unique opportunities, and enhancing returns by “replacing money-market securities with a higher-yielding collateral portfolio.”

“With this active investment approach,” UBS concluded, “we believe investors can navigate commodity markets effectively, and significantly improve the risk-adjusted returns of a broad commodity engagement versus a more passive strategy.”

On precious metals, the bank said that the recent Middle East crisis” reinforces the ongoing need for portfolio diversification.” The bank maintained a moderate overweight rating on gold amid geopolitical uncertainties.

For energy, UBS explained that the risk premium now being factored into prices could fade in case of no supply disruptions, while for industrial metals, the bank notes that tariff uncertainty and slower global economic growth are expected to have an adverse impact on demand in Q3. However, in the long term, they anticipate higher prices on the back of lower rates, a weaker USD and supply constraints.