Anthony Peters, SwissInvest Strategist
While the gloom seems to persist – there is no real reason for optimism other than that some of the grim predictions of what will come to pass might not pan out to quite as awful as had been feared – we are still breathing in and out and that’s not a bad start to the day.
However, there are signs of life. From where I sit, I cannot see the green shoots but I was intrigued to hear that Pierre Lorinet, CFO of the commodity house Trafigura, speaking in an interview in Singapore said: “The news flows about China are starting to look more positive and we are looking for that to translate into the real economy”. He went on: “Especially in the emerging world, we have come out of the cyclical downturn and will be back on the upswing.”
Whatever shorter-term dynamism there is in the global economy will have to be sought in East Asia
Lorinet was speaking at a time when Trafigura looks back on a tricky year with lower sales and profits but it was key that he is confidently forecasting a cyclical upswing in Asia. Europe is not dealing with cyclical issues but with structural ones – as Chancellor George Osborne will have to try to explain in his Autumn Statement tomorrow – and therefore we will have to assume that Japanese style ossification has either set in or is about to. Whatever shorter-term dynamism there is in the global economy will have to be sought in East Asia.
Time to get one’s hands dirty
Long cycle industries, on the other hand, such as commercial real estate with its long, long lead times might well have its merits. I dined with a real estate guy in London not long ago who has done rather better than most of us and who sniffed the downturn in good time. Timing, as we know, is everything.
However, in slow moving sectors where one can’t put on and take off one’s hedges six times in a day, having an instinct for the inflection points is of significantly greater importance than for bond or equity traders who can turn on a sixpence. He said to me somewhat out of the blue that he was beginning to feel more constructive on the outlook for his business and that after several years of unwinding positions and building up cash, he sensed that the time to get one’s hands dirty again was approaching.
Commodity prices are still depressed and commodity indices have performed badly this year. Oil has been particularly tricky; WTI entered the year at around US$100pbb and by March had risen to the US$110pbb area. Word on the Street was that it would not go below US$100 again in our lifetime. By the end of June, in the depth of the eurozone crisis it was back down at US$80 – so much for “never”.
Word on the Street was that it [oil price] would not go below US$100 again in our lifetime. By the end of June, in the depth of the eurozone crisis it was back down at US$80 – so much for “never”
This was the volatility which wiped out the CTA’s performance. By September it was back at US$100 and is now to be found in the high US$80s. High to low this year was 27% and year to date is -12.25%. As an asset class, commodities have been an expensive diversification and one which low underlying returns cannot really afford to support. And yet…
Oil is a difficult one to deal with. The exponential growth in shale gas extraction in the US has put a line through previous predictions and I understand that even those iconic American 16-wheeler truckers are beginning to turn to gas (as opposed to gasoline) power. Petrol prices are falling in the US; a New York friend told me yesterday that he’s found fuel at below US$3/gallon in the Carolinas. That’s not something which we Europeans would recognise.
Soft commodities and metals, on the other hand, might really be ready to bounce and rather than bemoaning how badly they have done in 2012, it might be time to plan for increased exposure in 2013 when an overweight in bonds will, in all likelihood, be the principal drag on performance. Goldman Sachs has a 7% performance penned in for commodities for next year. I might of course be wrong – I have a terrific track record in being wrong – but it is certainly worth giving commodities another chance in the strategic asset allocation, be that through equities, commodity funds or CTAs.