Main asset classes Commodities 50 | 51 demand subdued, as liquefied natural gas (LNG) compromises to hold additional supply auctions in availability as well as other efficiency-enhancing the near term, which caused carbon prices to pull Accelerating the transition measures are still not sufficient to fully replace back in H2 2022. At the same time, the ongoing pre-war volumes from Russia. However, the current industrial recession in Europe is reducing demand acute pressure should help accelerate Europe’s for emission certificates, offsetting the increased energy transition amid faster capital deployment and carbon intensity of power generation as coal plants reduced bureaucracy. For the benefits of this have been re-activated and gas use is maximized. It transition to come to fruition, Europe must ensure is important to note that no new supply has been The backdrop for cyclical commodities is likely to stay challenging and unity and set incentives to ensure private participation. created in this process but simply borrowed from the volatile, an environment that favors active solutions over passive benchmark s. future. Hence, we would see pullbacks in European Carbon price dips present long-term opportunity Union emission allowance prices as an opportunity Intense pressures (e.g., supply and price) within energy markets will Carbon prices are a key tool in tackling climate to build long-term exposure since carbon prices help accelerate the energy transition, while pullbacks in carbon prices could change. Recent reforms to the European Union’s must still rise substantially in order to provide Emissions Trading System scheme ensured the incentives to retire coal plants, and for industrial present longer-term opportunities. Gold upside optionality could be intended functioning of this market by addressing processes to switch from gray to green hydrogen considered, too. oversupply issues. However, increased carbon costs eventually. for industries added to the cost burden caused by Europe’s energy woes. Policymakers came up with Commodities had a turbulent 2022. Physical agricultural goods also tends to be less elastic than markets started the year already tightly supplied, but for hard commodities. As we enter 2023, the the Ukraine war and its impact on supply chains backdrop might still be unfavorable for cyclical added further pressure and caused prices to spike. markets. However, central bank tightening efforts are While prices have forced some demand response in likely to be advanced and peak hawkishness may be the meantime, supply buffers remain low and near, which would provide an improving backdrop for disruption risks elevated. That said, macro head- precious metals, especially gold. As central banks winds have been building, as high prices and risk causing a deep growth slump, we see some aggressive central bank tightening have started to upside risks to gold as we progress in time. It may be curb consumption, which may cause sub-trend premature to build outright exposure, but we see Pullbacks are opportunities growth in 2023. As a result, pressures on invento- merit in looking for medium-term upside optionality. European Union emission allowance prices, EUR/ton ries are likely to ease – barring further unexpected geopolitical events. As inventories normalize, Energy transition set to accelerate extreme backwardations in commodity forward Energy markets have been in the eye of a storm on 100 100 100 curves – a sign of physical shortages – have scope several fronts. Chronic underinvestment and several to flatten. From an investor perspective, this favors supply shocks (e.g., Russian gas export cuts, lack of 90 active and/or systematic solutions over passive contributions from renewables, unexpected nuclear 80 80 benchmarks since curve management is important in outages) triggered a power crisis and a recession in 80 the current phase to generate excess returns. the Eurozone. Households also face high energy bills. That said, price signals proved effective in 70 Backdrop for gold set to improve forcing adjustments, i.e., curbing demand. Refilling 60 60 Commodities are cyclical assets to varying degrees gas storage ahead of winter 2023/2024 will be the 60 across sub-sectors. Base metals and energy are next major challenge in case Russian flows fail to most sensitive to the business cycle, while precious normalize, which we do not assume. In other words, 50 40 metals are considered more defensive. Demand for prices need to stay historically high in order to keep 40 40 30 20 20 20 0 0 Nov 17 Nov 18 Nov 19 Nov 20 Nov 21 Nov 22 EUA front-month future EEX EUA Spot Auction Price Last data point 11/11/2022 Source Bloomberg, Credit Suisse