UBS Outlook: Balanced Risk-Reward for Commodities, Emphasizing Active Investment Approach

In its latest report, UBS expressed a mixed outlook for commodities but maintained a constructive stance on the asset class over the medium term. The bank expects commodities to provide strong diversification benefits for traditional bond/equity portfolios, although near-term risks have become more balanced. According to UBS analysts, momentum signals have improved recently, but macro signals suggest a mixed picture amid muted manufacturing and upside risks to inflation. As a result, the firm has moved its top-down allocation to neutral while keeping sector preferences unchanged. Looking ahead, UBS remains bullish on commodities over the longer term. 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 in the coming years. However, the bank cautioned that prices are unlikely to move higher in a straight line from here. To navigate commodity markets effectively, UBS recommends an active investment approach 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. On precious metals, UBS maintained a moderate overweight rating on gold amid geopolitical uncertainties, with the recent Middle East crisis reinforcing the ongoing need for portfolio diversification. For energy, the bank noted that the risk premium being factored into prices could fade in case of no supply disruptions. However, for industrial metals, tariff uncertainty and slower global economic growth are expected to have an adverse impact on demand in Q3. In the long term, UBS anticipates higher prices on the back of lower rates, a weaker USD, and supply constraints. In conclusion, UBS believes that with an active investment approach, investors can significantly improve the risk-adjusted returns of a broad commodity engagement versus a more passive strategy.