Commodities and Greenflation hot topics at SG Quant Conference – SG’s Hoff and PIMCO’s Sharenow on center stage.

First up, the role commodities should play in a portfolio during a time of greenflation and while the economy is transitioning to cleaner sources of energy. 

The conversation was timely, as traditionally structured 60/40 portfolios of equities and bonds had one of their worst years on record in 2022, as central banks deployed tightening measures to fight persistent inflation. 

Hoff said he is seeing investors placing more of an emphasis than they have in a quarter century on hedging against inflation, which is leading to an increased demand for commodities in portfolios.

Sharenow made the case that commodities should continue to play an important role as a diversification tool in environments of elevated inflation.

I believe that real assets are incredibly important when building resiliency into portfolios, he said.

The conversation then turned to carbon emissions, and the best way to reign them in.

Hoff noted that carbon is typically priced indirectly rather than upfront for consumers, denying the price transparency that would incentivize them towards more responsible behavior. 

Sharenow said a market-based approach to emissions would better allow investors to have a hedging solution and proper risk transfer.

One of the issues at play is that it’s challenging politically to provide the price transparency needed to influence people to change their behavior, which is why we haven’t seen broader adoption of carbon pricing. When we regulate tailpipe emissions on vehicles, it’s a carbon policy – either by encouraging electric vehicles or having average fuel economy standards. However, it’s a non-transparent price and there is an opportunity for the market to address this more efficiently and at lower cost.

One good example the pair cited for the impact of price transparency was how European power prices rose dramatically once the cost of the carbon was factored in, effectively doubling costs. Looking at the U.S. with pending legislation in New York and other regions set to follow California’s lead in pricing emissions, Sharenow said he thinks it’s within the realm of possibility that 50% of the U.S. economy could have some form of carbon tax in the relatively near future. 

In that scenario, they both agreed that the extent to which the cost of carbon will influence commodity prices and impact inflation overall is an open question. It should be considered, though, when developing bottom-up inflation forecasts in the more immediate-term, they said.

The SG Quant Conference in New York was held in person for the first time since 2020 and brought together hundreds of institutional clients to learn about the latest innovations and developments in the field of quantitative investing and featured a full-day of keynote sessions, panel discussions and workshops.