Com­modi­ties: don’t panic!

In­ter­na­tional ex­pert says fun­da­men­tals re­main healthy for a long-term bull mar­ket

Finweek English Edition - - Creating Wealth - LU­CAS DE LANGE

DON’T PANIC DUE TO tum­bling com­mod­ity share prices. The cur­rent down­turn is only a cor­rec­tion in an on­go­ing long-term bull mar­ket, since the un­der­ly­ing fun­da­men­tals for qual­ity com­mod­ity shares are still healthy. That’s the mes­sage from Jim Rogers, one of the most suc­cess­ful in­ter­na­tional in­vestors in com­mod­ity shares over the past few years.

Rogers – who achieved fame when in 1992, along with Ge­orge Soros, he started the Quan­tum hedge fund, which made nearly US$1bn of profit in 1997 when they forced a de­val­u­a­tion of the Bri­tish pound – pre­dicted the re­cent boom in com­modi­ties on the ba­sis of com­pre­hen­sive re­search. He not only de­vel­oped his own in­dex but also an in­ter­na­tional unit trust fund, which was par­tic­u­larly suc­cess­ful. Rogers cur­rently lives in Sin­ga­pore so, he says, he can be near the ex­cite­ment of Asia’s eco­nomic suc­cess story, es­pe­cially China’s.

It’s in fact on the ba­sis of this suc­cess – which is cre­at­ing mas­sive in­fra­struc­ture needs in China, In­dia and other East­ern economies – that Rogers ex­pects the bull mar­ket in com­modi­ties could con­tinue for a long time. “I’d be happy if it could con­tinue for an­other 10 to 15 years,” he says.

The cur­rent down­turn – Rogers can’t pre­dict how long it will con­tinue: “Per­haps a year or two” – could in fact ex­tend the bull mar­ket, since com­mod­ity com­pa­nies are cur­rently try­ing to de­ter­mine the con­se­quences of the fi­nan­cial credit cri­sis. What will the ef­fect be on the real economies? If the man­age­ments of those com­pa­nies start get­ting wor­ried, they could de­cide to post­pone projects – de­spite the fact dif­fi­cul­ties are of­ten be­ing ex­pe­ri­enced in meet­ing the de­mand from the East.

Rogers is now in­vest­ing es­pe­cially in agri­cul­tural com­modi­ties. The world’s farm­ers “are go­ing to get rich” given the favourable un­der­ly­ing fac­tors, he says. The rapid in­crease of the mid­dle class in coun­tries such as China and In­dia plays an im­por­tant role in the de­mand for agri­cul­tural prod­ucts. Not only do they eat more, they also tend to switch to the pat­tern in the de­vel­oped world – for ex­am­ple, eat­ing more meat.

It’s es­ti­mated that in China alone the mid­dle class in­creased by about 30m peo­ple over the past year, which of course also cre­ates a huge de­mand for elec­tri­cal do­mes­tic ap­pli­ances, ex­pen­sive cloth­ing, jew­ellery, cars and so on. Though China is also ex­pect­ing an eco­nomic slow­down, pre­dic­tions are nev­er­the­less for a 9% growth rate this year.

An­a­lysts say re­ces­sions due to the ex­pand­ing sub-prime cri­sis in the United States are be­ing ex­pected in West­ern

Only around 25 - 30% of China’s pop­u­la­tion of 1,3bn

is cur­rently part of that coun­try’s mod­ern in­dus­trial

econ­omy.

coun­tries. In China, there’s no in­ten­tion of cut­ting back the large in­fra­struc­ture in­vest­ments, though there could be a shift in em­pha­sis. It’s es­ti­mated China will have to de­velop 19 cities the size of New York within the next two decades to house its ur­ban­is­ing mil­lions. Only around 25 - 30% of China’s pop­u­la­tion of 1,3bn is cur­rently part of that coun­try’s mod­ern in­dus­trial econ­omy. The rest are wait­ing their turn to be­come part of a flour­ish­ing ur­ban in­dus­trial so­ci­ety – an ir­re­versible trend that will re­quire mas­sive quan­ti­ties of com­modi­ties.

Rogers is scep­ti­cal about the cur­rent pol­icy in West­ern coun­tries of cre­at­ing tril­lions in liq­uid­ity in or­der to save a frozen fi­nan­cial sys­tem. He says Ja­pan has been strug­gling for 15 years to keep what he calls zom­bie com­pa­nies go­ing. If it had al­lowed re­ces­sions to run their course such com­pa­nies would have dis­ap­peared from the scene, to be re­placed by new, pros­per­ous com­pa­nies.

Rogers says try­ing to avoid the cur­rent re­ces­sion in the US and else­where by cre­at­ing money on a gi­gan­tic scale will in the end cost more than it would by sim­ply al­low­ing the shake-out to run its course. “How can peo­ple go and buy four or five houses without hav­ing the money? There must be pain now to cor­rect those ex­cesses.”

He be­lieves the world must ex­pect a “mas­sive” wave of inflation. The prob­lems that will re­sult could be even more se­ri­ous than the cri­sis cur­rently be­ing ex­pe­ri­enced. Rogers’ ad­vice to in­vestors who are cur­rently so con­cerned about the fall­ing prices of com­mod­ity shares is to wait un­til the sit­u­a­tion sta­bilises. For the or­di­nary in­vestor it would then be ad­vis­able to in­vest in trade­able in­dex se­cu­ri­ties. That’s the safest – “be­cause 80% of port­fo­lio man­agers can’t beat such an in­dex”.

As the An­glo Amer­i­can graph shows, its ul­tra long-term trend­line is still hold­ing, while it has reached the worst over­sold level in 20 years. The JSE’s Re­sources 20 in­dex has also reached a sim­i­lar over­sold level, from which price re­cov­er­ies have occurred in the past.

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