Strategic materials are emerging as essential pillars of the energy transition and digital transformation—redefining long-term portfolio construction.
In this perspective from Bank J. Safra Sarasin, structural scarcity, inflation protection, and ESG integration converge to position commodities as a renewed strategic allocation for institutional investors.
Why are strategic materials and commodities attracting growing interest from institutional investors today?
We believe we are at the beginning of a new commodity super-cycle, driven by a sharp increase in demand for strategic materials. The green transition is highly materials-intensive, requiring substantial resources to build renewable power generation and support broader electrification. In addition, many countries around the world are simultaneously shifting away from fossil fuels, driving demand at the same time.
However, the green transition is not the sole factor contributing to the positive outlook for strategic materials. Global demand is also fueled by infrastructure investments, continued urbanization, growth in emerging markets like India, and global population growth. This positive demand outlook is met with an inelastic supply, which bodes well for future prices. Developing new supplies of strategic materials takes years due to the complexity and lengthy exploration and engineering processes involved. As the supply-demand gap becomes more apparent, strategic materials and commodities are attracting growing interest from investors. They recognize that this imbalance may present an investment opportunity, marking the beginning of a new investment era in these critical resources. Additionally, commodities are seen as a hedge against inflation and a diversifier in a balanced portfolio. As geopolitical tensions rise and global economic uncertainties persist, investors are turning to commodities that may protect their investments and bring more stability.
How do you differentiate between the equity approach and direct commodities exposure when addressing these themes? Which investor profiles typically favor each approach?
Equity-based investing and direct commodities exposure are fundamentally different yet complementary approaches.
Equities provide a leveraged exposure to commodity prices. In a positive price outlook, mining equities typically outperform the underlying commodity as their earnings, cash flows, and dividends/capital returns grow faster. This is because these companies have high operating leverage: a high fixed cost base and strong operating earnings growth driven by higher commodity prices.
In addition, an equity solution can benefit from positive stock selection and the active selection of the most attractive segments of the value chain. The value chain approach is a key differentiator of this strategy. Lastly, equities offer attractive dividend yields, which can provide income opportunities and support valuations. Meanwhile, commodities provide direct exposure to price movements driven by supply and demand. This may allow investors to capitalize on structural shortages or surpluses without relying on corporate performance. In addition, certain commodities, particularly precious metals (gold, silver) and energy resources (oil, natural gas), tend to rise in value during periods of inflation. Holding them directly can help preserve purchasing power when fiat currency loses value. Furthermore, commodities often have a low correlation with traditional stocks and bonds, helping investors reduce overall portfolio volatility. This makes them particularly useful in times of market uncertainty.
Equities tend to appeal to long-term investors and institutional investors focused on capital appreciation. Meanwhile, commodities attract tactical traders, inflation-hedgers, and portfolio diversifiers seeking assets with low correlation to traditional markets and direct sensitivity to macroeconomic shifts.
From a portfolio construction perspective, integrating both approaches enables investors to balance structural long-term growth with short-term price responsiveness, enhancing adaptability to evolving market conditions while mitigating risk.
The JSS Sustainable Equity – Strategic Materials fund follows an Article 8 sustainable investment approach. What criteria do you use to select companies in this sector?
Our equity solution enables investors to gain exposure to this trend through companies with strong environmental, social, and governance standards. Our fund is Article 8 under the EU SFDR and invests only in stocks rated JSS A and B based on our proprietary JSS Sustainability Matrix.
ESG issues are found in the upstream part of the value chain, specifically in mineral extraction. These issues include environmental impact, loss of biodiversity, and greenhouse gas emissions linked to mining activities.
However, mining minerals remains essential for building the equipment needed for the green transition, so beyond obvious ESG issues, there are also opportunities:
- for companies with best practices in the mining industry;
- there are also opportunities for companies in the mining equipment industry; for example, those providing machinery, processes, and services to improve environmental impact and workplace safety will be rewarded.
- Finally, there are also parts of the strategic materials value chain that are inherently aligned with sustainability principles. This is the case with the recycling segment of the value chain. Most metals can be recycled indefinitely, making strategic materials a significant opportunity for the circular economy.
Since the strategic materials value chain is sensitive to ESG issues, we use our proven ESG analysis resources to exclude companies that do not meet our minimum sustainability requirements. ESG integration may also contribute to returns, as metals and mining companies with stronger ESG credentials tend to outperform those lagging behind on ESG.
In addition, investing in equities enables us to drive positive change with our portfolio companies through active engagement.
We believe that an active dialogue with portfolio holdings is critical to helping companies improve their sustainability metrics. To this end, we have a dedicated stewardship team to support the portfolio management team.
With an 18-year track record, the JSS Commodity strategy has proven its resilience through various market cycles. How does this experience help you navigate current challenges such as volatility, inflation, or de-dollarization?
At Bank J. Safra Sarasin, our commodity strategy is grounded in extensive academic research and
implemented through a systematic, rule-based selection and allocation approach. This approach
aims to provide diversified exposure to a wide array of commodities across energy, metals, and
agriculture. We believe that investors may benefit from maximizing exposure to various segments
of the commodity universe. Our portfolio construction process places less emphasis on commodity
price forecasts, as these markets can be opaque and subject to sudden shifts in fundamentals.
In today’s volatile environment, our systematic strategy enables us to maintain a disciplined
approach while capturing the inherent advantages and mitigating the risks inherent to
commodities.
Looking ahead, how do you see the role of strategic materials and commodities evolving in diversified portfolios over the next 5 to 10 years?
Recent geopolitical developments and announcements of large-scale projects underscore the growing importance of strategic materials. For instance, as part of the “Unleashing American Energy” executive order, the new Trump administration highlighted the importance of critical materials for the U.S. with the aim of securing supply and advancing the mining and processing of minerals within the United States. Meanwhile, a range of significant global initiatives promises to further fuel demand in the coming years.
In Europe, Germany’s €500 billion infrastructure fund, coupled with the EU’s Green Deal, which will mobilize over €100 billion, sets the stage for heightened demand for materials. In the United States, the $500 billion Stargate Project, aimed at funding AI infrastructure, will require more data centers, which in turn will drive up demand for copper to facilitate grid connections. The EU’s InvestAI plan, worth €200 billion, also emphasizes developing local AI infrastructure, promising additional growth catalysts for strategic materials. Against this backdrop, companies with exposure to these materials present a compelling narrative of growth potential. Furthermore, companies in the strategic materials value chain possess characteristics that make them particularly attractive in the current economic environment. Offering a hedge against inflation and trading at low multiples compared to the broader market—whose P/E ratios remain above historical averages—they present a compelling proposition for investors.
In conclusion, strategic materials and commodities offer unique diversification potential with robust structural growth drivers. Incorporating them into a diversified portfolio may improve its risk-return profile. Therefore, their importance is expected to grow over the next five to ten years.
Disclaimer: This article is provided for informational purposes only. It does not constitute
investment advice or a recommendation to buy or sell. Past performance is no guarantee of
future performance. All investments involve risk, including the risk of loss of capital.
