When will the energy crisis end?
Prices continue to rise for raw materials, including oil and natural gas, and it seems like the end of this story is still not in sight. The big question investors are now asking is how long this upward trend in commodities prices will last, which is in turn causing a reappearance of the old specter of inflation. According to Ismael García Puente, MGP Investment Manager and Fund Selector, one reason behind this seemingly unstoppable rise, in addition to geopolitical issues involving Russian natural gas and some severe weather events last winter, is a lack of investment during recent years in companies linked to fossil fuels. He says that this is “weakening the flexibility needed to respond to a very high level of demand”, and this is therefore causing a mismatch between that demand and the available supply.
All this is taking place at a time when 40% of Europe’s energy mix consists of coal and natural gas, and the transition to clean energy sources “cannot be accomplished overnight.” The solution, he says, is to start making decisions that look beyond the short term to address the challenge of climate change. As this expert points out, that will require “high levels of investment so that countries can comply with the Paris Climate Agreement.”
However, the issues that have arisen around commodities prices are bringing to light another problem being faced by investors. The debate over whether the reemergence of inflation is permanent or temporary seems to be fading, and instead, analysts are now trying to determine which assets could be used for hedging the increasing price levels seen during recent months. On this subject, García Puente does not think there is any specific product that can mitigate the effects of inflation. Instead, he points to specific industries that seem to be performing well, such as energy and real estate. He also explains that fixed-income securities, and more specifically bonds linked to inflation, are emerging as one of the most in‑demand options. However, he also warns that “in order to achieve higher yields with those bonds, inflation needs to be above the levels forecast for it, and traditionally those forecasts have tended to overestimate price levels.” In relation to this, he also reminds private investors about the importance of good financial advising, especially for this asset type.