Key Highlights

• Base metals at record highs, helping exporters’ terms of trade
• Equity positioning favors metals, while energy continues to underperform
• Chile moves to forefront of commodity rally

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Commodity FX starting to react to underlying price action

EXHIBIT #1: COMMODITY CURRENCY (CLP, BRL AND ZAR) FLOW VS. EM FX FLOWS

_{Source: BNY iFlow}

Our take

Event risk early into 2026 has put global commodities and related assets into focus, far more so than the semiconductor and AI view that was expected to dominate proceedings. Furthermore, the current drivers for commodities are also largely independent of monetary policy moves, with supply concerns arising from tariffs and geopolitics leading the price action. That said, policy is also supportive. Language from Fed members early in the year, and a renewed pledge issued Tuesday by the People’s Bank of China to pursue further easing, will be seen as favorable through the dollar weakness and Chinese demand recovery channel. Whether these two factors can be realized is a separate matter. Still, the outlook is increasingly favorable, and flows are reacting: Our basket of commodity FX (CLP, BRL and ZAR) is outperforming broader emerging market (EM) FX for the first time in nearly two months, while in absolute terms, flows are their strongest in a quarter (Exhibit #1).

Forward look

Commodity currencies tend to be susceptible to stagflation risk and fiscal dominance, so policy credibility remains essential. If we incorporate positively exposed G10 names such as AUD, the recent pivot in policy pricing toward inflation vigilance not long after the latest rate cut shows the risks of stubborn inflation based on supply constraints – most notably in labor. Higher levels of investment in resource industries, coupled with stronger fiscal impulse arising from resource-based revenues, also risk a lift in price expectations. The best way to counter such fears is for governments to continue exercising fiscal vigilance – an area where South Africa was exemplary throughout 2025.

It would also be prudent for central banks to pivot toward inflation anchoring. We acknowledge that the current commodity demand does not align with price trends, so flexibility is essential. However, until currency strength starts to exert a clearly disinflationary effect, the case for further easing remains weak across global commodity producers. The consensus forecast for inflation in non-energy-based commodity economies in 2026 is uniformly above 3%.

Equities: Metals & Mining surge continues from Q4 run; Oil not reacting to developments

EXHIBIT #2: GLOBAL EQUITY HOLDINGS – TOTAL VS. OIL & GAS AND METALS & MINING (GICS LEVEL 3) INDUSTRIES

_{Source: BNY iFlow, Bloomberg}

Our take

Equity markets have been reacting strongly to moves in base and precious metals since early December. After a brief dip in November, holdings in global equities in the Metals and Mining industry (GICS level 3) recovered strongly, ending the year more than 40% above the rolling 12-month average. Metals and Mining is unlikely to match the growth status or capitalization of semiconductors and other tech names, but it will be difficult to push back against current price action, given the momentum behind industrial metals.

Meanwhile, the divergence versus equivalents in Oil and Gas is also widening (Exhibit #2), and the industry is significantly underperforming the wider market’s holdings. While geopolitical events are arguably more significant for energy markets, it is widely acknowledged that material changes to global supply will take time to emerge. There is no repricing for related companies or economies, as OPEC members continue to cut prices. As stated above, commodity economies with higher levels of industrial or base metals exposure have inflation forecasts above 3% for this year. Meanwhile, energy producers such as Canada, Norway and larger Middle Eastern names – including Saudi Arabia and the United Arab Emirates – all expect headline CPI to remain closer to 2%.

Forward look

The current state of Oil and Gas equity flow and holdings, in our view, better reflects global fundamentals. The market is still struggling with oversupply while the U.S., as a net energy exporter, cannot affect prices through the tariff channel. Crucially, it is the global growth outlook and structural demand shifts that continue to impact prices. In contrast, industrial commodities are less affected, given the lack of immediate substitutes. However, if risks to Chinese growth and producer prices remain skewed to the downside, it will be difficult, for now, to make a prolonged bullish case for general input costs.

Unless there is a material global growth lift, we expect medium-term convergence to come through between energy and metals, with the burden of adjustment skewed heavily toward reducing holdings in the latter.

Asset Allocation: Chile aims to replicate early December asset flow surge

EXHIBIT #3: MONTHLY SMOOTHED FLOW INTO CHILE – FIXED INCOME AND EQUITIES

_{Source: BNY iFlow, Bloomberg}

Our take

Several countries saw comprehensive asset inflows last year. They were mostly in EMEA, where the likes of Hungary, Poland and South Africa enjoyed unhedged, cross-border equity and fixed income buying. There was some degree of rebalancing toward year end, and fiscal dominance concerns in Hungary and Poland led to further liquidation flows across different asset classes. In contrast, South African positioning remains well-anchored, and the current run higher in commodities is lending the country additional support. Given recent moves in copper and other industrial metals, we believe Chile, among EM names, is positioned for a similar surge across all asset classes. The copper narrative is now well-established, and the political alignment between Santiago and Washington, D.C. is also seen as stronger since last year’s Chilean presidential elections. As Argentina’s experience shows, such alignment is often a prerequisite for outperformance in flows and holdings.

Forward look

Asset flows into Chile were exceptionally strong in the first half of December as the second round of the presidential election approached, so the political premia is arguably already priced in. Terms of trade have continued to improve, but nominal yields remain low relative to peers. It is therefore imperative for the country to maintain policy credibility to avoid fiscal dominance and anchor real rates. Inflation is expected to flatten out at around 3% through the forecast horizon, keeping real rates just above 100bp, less favorable than Brazil or Mexico.

Coupled with uncertainty over Chinese demand for copper and lithium, additional measures are needed to diversify and sustain growth above the expected 2% range – changes that would also support equity flows beyond traditional mining-linked sectors. Authorities will need to seize the initiative while financial conditions remain exceptionally loose.

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