The global economy is facing a number of challenges in the year ahead. In particular, the prospect of reaccelerating inflation could be a headache for policymakers. Over the past two years, falling inflation has allowed central banks to cut interest rates, providing a benign backdrop for global markets. However, increased trade tensions, tariffs and reshoring could see inflation expectations rise through 2025 curbing hopes for rate cuts.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

There is also a possibility that already-fragile geopolitical relationships become even more strained under the new US administration. The incoming US government’s extra-territorial ambitions appear likely to set it on a collision course with allies and enemies alike. There also appears to be little prospect of an easing of existing conflicts such as those in Ukraine and the Middle East.

This is a complex environment for investors to navigate in the year ahead. We have already seen that a traditional 60-40 portfolio isn’t providing the level of diversification it once was.1 This may continue if volatility on interest rate expectations continues.

The appeal of investing in energy and mining companies for diversification

Against this backdrop, investors will need to look at other options to achieve diversification in their portfolios and insulate themselves against some of the geopolitical risks in markets. We believe investments in energy and mining companies should have appeal. Selected exposure to commodities has offered some protection against an inflation rise historically. Goldman Sachs research suggests:

“Commodities have demonstrated strong resilience in the face of inflation and have been a critical hedge for bonds and equities when prices and wages are climbing.”

At the same time, the mining and energy sectors have looked cheap relative to broader equity markets for some time. In recent months, for example, the BlackRock Energy and Resources Income Trust has been adding to energy transition companies, taking advantage of volatility after Trump’s election win to add more.3 Relative valuations may improve if companies report better-than-expected earnings, which is plausible given stronger-than-expected average prices for most commodities over the medium to long-term.

Demand in mined resources to remain high despite energy transition

There are also longer-term factors driving investment in energy and mining companies. The expansion of artificial intelligence, for example, brings significantly higher energy needs. A Generative AI system might use around 33x more energy than machines running task-specific software.5 Data centres, which store and analyse the data needed to power AI models, also create demand for specific resources. Technology hyperscalers such as Microsoft, Amazon and Google have expressed a preference for nuclear energy to power their artificial intelligence (AI) data centers, boosting sentiment for uranium and uranium mining companies.

The transition to lower carbon fuels is also influencing demand and creating long term investment opportunities. Consultancy group McKinsey estimates that low-carbon energy sources will grow from 32% of the global power generation mix today to 65 to 80% by 2050.7 Much of the increase will occur due to electrification in the buildings and transport sectors, coupled with decarbonisation of the power sector.

However, fossil fuels will still be needed while the transition takes place. Although demand growth may be falling, if the supply side of the equation is constrained at a faster rate than demand is eroded, then we will still see higher-than-expected long-term prices. Global oil demand over the past four years has proved to be much more resilient than had been expected by market forecasters in 2019.8 We have been adding to oil and gas exploration and production holdings, believing they may prosper under the new US administration.

On the BlackRock Energy and Resources Income Trust, we expect the low carbon transition to drive structural demand growth for a range of commodities, creating growth opportunities. Building wind turbines, solar panels and electric vehicles requires commodities such as copper, iron ore, coking coal, steel, silver, aluminium, lithium, zinc, nickel and rare earths. With countries holding ambitious net zero targets for 2050 or 2060, we expect this wave of demand to play out over decades, far longer than a traditional cycle.

Source: BlackRock