Commodities: don’t panic!
International expert says fundamentals remain healthy for a long-term bull market
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
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.