Foreword


A QUESTION I am often asked is: Is this the right time to be invested in commodities? Although we have seen some big moves in some commodities so far this year, are commodities relevant in this stage of the cycle?


Commodities are physical assets that –


largely speaking – respond to the current environment ... the ‘here and now’. By nature this makes them later cycle investments. In this edition we asked Morgan Stanley’s Adam Longson to give us his views on this vexing question [see page10].


The rally across a number of commodity


sectors has resulted from a variety of factors, most of which are believed to be transient. For example, cold winter pushed up US natural gas prices and weather conditions in Brazil sent coffee prices sharply higher. Even gold has had a surprising run so far in 2014. Does this suggest that the most hated commodity investment of 2013 is at a turning point? Gold may be drawing support from short covering and a robust start


to the year for Chinese


consumption, but many believe the rally will flounder.


The Ukrainian crisis, meanwhile, has pushed


up wheat and corn prices and has further ramifications for the energy sector given Russia’s position as the world’s largest oil and natural gas exporter. The crisis still has the potential to have a significant and prolonged impact on the global economy and financial markets – a worrying prospect in the coming months which could easily derail an otherwise brighter global economic outlook.


More robust growth in the US, and some


modest economic improvement in Europe, is providing a solid foundation for global trade flows. From a political perspective, however, many see a continuation of relatively high risks in many emerging market countries. This leads us to expect potentially wide divergence in FX and equity market performance among EM countries in 2014 – depending on the evolution of local political risks [see page 66].


The commodity landscape has changed.


Increased competition, a revised regulatory framework, pricing transparency, slower Chinese growth, a globalised marketplace, alongside investments in renewables, oil and


gas shale and LNG ... all have contributed to market complexity. But there’s a new dynamic force that is prevalent and accelerating at a pace we have never seen before in human history – Big Data [see page 49].


For the immediate future, it’s not clear if higher prices across a number of commodities can be sustained. China’s premier Li Keqiang’s warning that future defaults on bonds and other financial products are “unavoidable” underlining concerns that a wave of bad debts threatens to derail growth in the world’s second largest economy are now a serious threat.


Not surprisingly, slower Chinese growth and a weaker yuan is not helping base metals and bulk commodities. As growth prospects in China and other emerging countries are likely to remain hampered, the easing of monetary stimulus in the US and the dampening of credit growth in China remain headwinds for commodities. Increased supply of some commodities has also contributed to their unpopularity for some. This means that most prices are likely to remain stuck in broad ranges.


Expect the divergent performance of commodities to continue as emerging macro dynamics and geopolitics alter the ebb and flow of investor sentiment giving rise to commodities changing tracks. •


Guy Isherwood, Publisher and Editor.


March 2014


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