The fast view
- US equities have become increasingly concentrated, exacerbating sector and valuation risks. At the same time, the tech- and growth-heavy S&P 500 Index1 is vulnerable to inflation.
- Natural resources equities can help mitigate the risks of a US equity-focused strategy while offering some inflation protection.
- With inflation proving sticky, and the long-term outlook for commodities supported by resource underinvestment and electrification, the case for natural resources equities is strengthening.
Introduction
Investors with sizeable allocations to US equities often grapple with sector and regional concentration. At the same time, with the S&P 500 Index increasingly dominated by a narrow set of technology and growth stocks, the US equity benchmark is vulnerable to inflationary periods.
This viewpoint explores why allocating a portion of US equity exposure to a natural resources equity strategy may help to manage these risks.
The limitations of a US equity-heavy portfolio
The S&P 500 Index of US equities has delivered strong performance in recent years. Yet the current structure of the US equity universe presents significant risks.
Concentration risk
With the S&P 500 Index concentrated in the Magnificent 72, the technology sector now represents approximately 30% of the US equity benchmark, compared to about 19% in 20103. For investors with sizeable US equity exposure, this has created sector-concentration risk and, from a style perspective, a heavy bias towards growth equities. Relatedly, return correlations among the handful of stocks that dominate the US equity market increase the risk of synchronized drawdowns.
A US equity-heavy portfolio also has narrow geographic exposure. The S&P 500 Index consists entirely of US-domiciled companies, limiting exposure to growth drivers from the rest of the world, particularly emerging markets. This excludes regions that are benefiting from rising demand for essential resources, such as energy-transition materials, industrial metals, and agricultural commodities.
Inflation vulnerability
The growth-dominated structure of the US equity market makes it more susceptible to inflationary environments, during which stocks trading at high valuation multiples tend to be hardest hit. The tech- and growth-tilted S&P 500 Index has limited exposure to sectors that have historically protected against rising prices, such as real assets including natural resources, infrastructure, and real estate. This leaves US equity investors vulnerable to inflation-driven value erosion, as occurred in the 1970s stagflation and the 2021-2022 inflation spike.
Figure 1: US equities during:
Stagflation in the 1970s
The 2021-2022 inflation spike
Source: Bloomberg, Ninety One. Graphs show price level of the S&P 500 Index over time.
How natural resources equities can help
We believe an allocation to natural resources equities can help to address these challenges, complementing US equity holdings by balancing some of the risks present in the latter asset class.
Diversification
The natural resources equity universe is extremely varied, with companies spread across energy, metals & mining, and agriculture industries. However, it has no exposure to the technology sector4.
Natural resources companies therefore tend to operate on different cycles to the US equity market. This group of stocks also contains a wide variety of performance profiles and return drivers within it (for example, dynamics in the gold and aquaculture sectors have little in common).
Figure 2: Natural resources subsectors
Energy |
Metals & mining |
Agriculture |
|---|---|---|
| Oil & gas (integrateds, exploration & production, refining and services) | Iron ore | Seeds |
| Pipelines | Metallurgical coal | Crop protection |
| Liquified natural gas | Copper | Fertilisers |
| Renewable energy (producers and servicers) | Nickel | Agriculture and farm equipment |
| Uranium | Zinc | Grains trading and processing |
| Thermal coal | Lithium (miners and processors) | Forest-based building products |
| Battery minerals and metals (e.g. graphite) | Pulp, packaging and paper products | |
| Aluminium (bauxite mining, alumina refining and smelters) | Protein (land- and sea-based) | |
| Steel production | ||
| Gold and silver | ||
| Platinum group metals |
Source: Ninety One.
Natural resources equities can also help to mitigate the regional concentration of a US equity allocation, by providing access to industries that are driven by global supply and demand dynamics rather than domestic US conditions. Natural resources companies span sectors and regions which are integral to global infrastructure construction and operation, electrification, and industrial development. This gives investors exposure to global economic growth trends, particularly in emerging markets where the demand for resources is increasing due to industrialisation and the energy transition.
Given their distinctive return drivers, natural resources equities have historically had low alpha correlation with US stocks. Over the last two decades, the S&P 500 Index and S&P Global Natural Resources Index have exhibited alpha correlation of -0.44, highlighting their potential as a diversifier for US equity-heavy portfolios5.
Inflation protection
Natural resources equities tend to outperform in inflationary environments, acting as a natural inflation hedge via resource-price exposure.
The tendency of this asset class to provide some inflation protection was recently evident during the 2021-22 inflationary period – where natural resources equities significantly outperformed S&P 500 Index – but can also be seen over the longer-term (see chart). Since December 2001, natural resources equities have outperformed all asset classes, including US equities, during high-inflation environments. They have also provided competitive returns in normal ‘sticky’ inflationary environments.
Figure 3: Percentage of time asset class generates a positive real return during ‘high inflation’ environments*
Past performance is not indicative or a guarantee of future results.
Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Source: Ninety One, Bloomberg. High inflation is above 2.5% (the 75th percentile of the data). Low inflation is below 1.3% (the 25th percentile of the data). Normal inflation is between 1.3% and 2.6%. Inflation proxied by CACCPI YoY. Data from 31 December 2001 through December 2024. Fixed income = Bbg Global Agg UH USD, Global equities = MSCI ACWI USD, TIPS = Bbg US Treasury Inflation Notes (TIPS), futures-based commodities = BCOM Index (TR), natural resources equities S&P GNR Index, Gold = US4/oz, Global infrastructure = S&P Global Listed Infrastructure Index USD, Global real estate = MSCI World/Real Estate Index USD. US equities = S&P 500 Index. *Real return: 12-month rolling net of CPI YoY.
We expect that the next financial cycle will be more inflationary than the previous one, due to structural trends including deglobalisation, electrification, and shifting debt and demographic trends. There is also a risk that the new US administration’s policies, including its willingness to impose tariffs, could stoke price pressures. Diversifying some US equity exposure into natural resources equities is one way investors can seek to navigate a higher-inflation environment.
Outlook for natural resources equities and US equities
In the context of exceptionally strong US equity performance in the past decade, from a relative performance perspective natural resources equities have faced headwinds in recent years. The question for investors is whether the status quo will prevail.
Looking ahead, we believe that structural inflation, underinvestment in the production of natural resources, and electrification present a more favorable backdrop for natural resources equities relative to US stocks. In addition, the new US administration has brought in a substantially changed policy agenda, with growth and inflation outcomes that are difficult to predict at present. At the same time, US equity valuations appear extended on most measures. The balance of risks in global equity markets is arguably shifting.
As investors navigate an evolving market landscape, three key factors support a strategic allocation to natural resources equities, namely the potential to:
- Mitigate some of the sector, regional, and inflation risks associated with US equity allocations. We see this as particularly valuable if the investment landscape shifts and inflation settles structurally higher.
- Add distinct return drivers to an equity portfolio. With different return drivers, natural resources equities have the potential to offer a complementary return profile to US equities.
- Provide exposure to stocks with lower valuations. Natural resources equities currently trade at significant discounts vs. broad equity markets (see charts). We think strong free cashflow yields and shareholder returns enhance their appeal, particularly in today’s inflationary backdrop.
Figure 4: Valuation metrics
Source: Ninety One, 31 December 2024 data. Barclays estimates for Energy, Miners and Steels,
Bloomberg for S&P 500. Uses S&P 500 as a proxy for US equities.
Figures shown are third party estimates and not representative of related portfolio projections.
Actual performance of related portfolio investments and the related portfolio overall may be adversely affected by a variety of factors.
The path ahead
US equities have delivered exceptional returns, but their dominance comes with risks: sector concentration, inflation exposure, and limited geographic diversification. Natural resources equities have the potential to provide a differentiated return profile that may help to mitigate these risks.
We believe the potential for a shift in market dynamics – particularly driven by higher structural inflation, the energy transition, and underinvestment in resources production – make this a good time to consider an allocation to natural resources stocks.
1 For further information on indices, please see the Important information section. For professional investors and financial advisors only. Not for distribution to the public or within a country where distribution would be contrary to applicable law or regulations.
2 Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
3 Source: Bloomberg, March 2025.
4 S&P Global Natural Resources Index has 0% weighting of the GICS L1 Technology Sector.
5 Source: Bloomberg, 31 December 2004 – 31 December 2024. vs MSCI ACWI Index, S&P 500 Index and S&P Global Natural Resources Index have exhibited alpha correlation of -0.44. Based on monthly data, in USD.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Past performance does not predict future returns. Investment objectives may not necessarily be achieved; losses may be made. Target returns are hypothetical returns and do not represent actual performance. Actual returns may differ significantly. Environmental, social, or governance-related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions, and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease while more broadly invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations, which may also lead to a financial loss. Equity investment: The value of equities (e.g., shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g., insolvency), the owners of their equity rank last in terms of any financial payment from that company. Commodity-related investment: Commodity prices can be extremely volatile, and losses may be made. Emerging market (including China): These markets carry a higher risk of financial loss than more developed markets, as they may have less developed legal, political, economic, or other systems.
Authored by
Learn more about our strategies
