DSIJ Mindshare

The Twist In The Commodities Tale

Vikas Gattani is a seasoned financial industry veteran with over twenty-two years of experience in trading and investment management in the Asia Pacific financial markets. He was formerly CIO of the internal hedge fund group of JP Morgan Asia and has also run the Asian Investments group at Merrill Lynch, Hong Kong. Vikas is the founder and CEO of Progress Capital, a multi-family office run out of Singapore, which manages assets for ultra-high net worth individuals.

The idea of this article is to provide fortnightly investment/financial market-related news/views in high growth Asia Pacific markets excluding India. It is intended to provide information and eventual investment opportunities for readers of DSIJ who would like to diversify their investment horizon outside of India.

The Twist In The Commodities Tale

On May 5, 2013, Malaysia will witness a major political event - its national general elections. This election will decide the fate of the ruling PM Najib’s UMNO party, which is contesting against a coalition of opposition parties led by the country’s former Finance Minister Anwar Ibrahim. This contest is being keenly watched, especially in the background of the UMNO’s uninterrupted single party rule in Malaysia since 1963.

As for the markets, the Korean won has been under pressure as easy monetary policies by the Bank of Japan (BOJ) have weakened the yen, which has fallen by almost 20 per cent against the dollar over the past six months. This makes manufacturers in Japan more competitive relative to those in Korea. On April 17, 2013, South Korea unveiled a USD 15.5 billion supplementary budget, which the government said will boost the country’s GDP growth by 0.3 per cent and add 40000 jobs. North Korea’s missile threats have also added pressure, pushing the currency to an eight-month low of 1144.82 to the dollar, but have since rallied over two per cent after witnessing signs of its willingness to restart talks with the US.

The G-20 Finance Ministers and central bankers met for two days starting April 18, 2013 in Washington. The member nations seemed less concerned about currency wars and sovereign debt blowouts, and instead wanted to promote economic growth initiatives. Japan was not singled out or blamed for the huge yen depreciation. In fact, the yen has been given an all-clear to proceed as planned. The focus, however, was on Europe and the two themes of ‘austerity and spending’. The Eurozone governments were urged to promote growth and reject hard debt cut targets. With the US hitting a soft patch and China seemingly growing at a slower pace, it is no surprise that the ‘G-20 neglected’ Japan and would prefer to see a pickup in global growth instead.

The People’s Bank of China (PBOC) will free up trading in its currency by allowing more market participants and lower transaction costs as the next step in exchange rate reform. Just last year, the PBOC had doubled the band to one per cent on either side of its daily reference rate, which was set at 6.2342/dollar on April 17, 2013. Premier Li Keqiang said that he would deepen exchange rate reform and open up the economy further to market forces.[PAGE BREAK]

In economic news, China unexpectedly grew at a slower pace as gains in factory output and consumption weakened, driving stocks and commodities lower. The country’s GDP grew 7.7 per cent YoY as against a 7.8 per cent median forecast. Industrial output rose 8.9 per cent YoY compared to the expected 10.1 per cent and 9.9 per cent that it clocked on a Year-to-Date basis. The HSBC Manufacturing PMI in April 2013 slowed to 50.5 against an expectation of 51.5, thereby showing signs of weakening in the manufacturing sector. This, along with weaker data from the US, portends a slowdown in the global economy, which could continue to rattle the global financial markets in the upcoming summer months.

Singapore’s retail sales also fell 2.7 per cent YoY (against an expected -3.5 per cent) for February 2013 as consumers spent less on motor vehicles and expenditure dropped on household equipment and at gas stations.

 Financial Markets Summary: Asia (ex India Market) Apr 12–26, 2013
IndexApr 12Apr 26*2-wk Chg (%)YTD** (%)USD vs Currency** (YTD %)Foreign Flows (Equity) (USD Mn)
Shanghai 2,207 2,178 (1.3) (4) 1 NA
Hong Kong 22,089 22,535 2.1 (0.4) (0.2) NA
Singapore 3,294 3,345 1.6 5.7 (1.3) NA
Korea 1,924 1,945 1.1 (2.6) (4.3) (4,253)
Thailand 1,527 1,580 3.4 13.5 4.1 (660)
Indonesia 4,937 4,996 1.1 15.7 0.7 1,968
Philippines 6,891 7,039 2.1 21.2 (0.5) 1,254
NIFTY 5,529 5,881 6.4 (0.4) 1.3 10,688
Vietnam 494 475 (4) 14.9 (0.4) 190

Source: Bloomberg, * - Latest figure as of report produced

[PAGE BREAK]

Over the past few weeks, there has been significant movement in gold prices globally. Gold, which was priced at USD 1615/oz as of March 21, fell to an intraday low of USD 1315/oz on April 16 before recovering to hover at the USD 1475/oz levels. This fall has been attributed to the unwinding of significant long positions, fund/ETF related selling and a fall in consumption.

This author feels that gold’s rise over 2002-2012 was led by the following primary drivers:

  • A weakening USD
  • Hedge against inflation in current times of excessively easy monetary policy
  • Rising consumption, primarily in India and China, on account of rising income levels
  • Underinvestment in gold production
  • Slowdown in selling of gold reserves by central banks, especially European central banks,
  • which aggressively reduced their gold holdings over 1999-2003; and
  • Creation of new financial products like gold ETFs

However, most of these factors have now reversed. As the US economy recovers and deficit cuts come in place, there is a definite shift of global flows into the USD, thereby leading to strengthening of that currency. Global economies, particularly those of the West and Japan, are showing no inflationary pressures. Gold consumption in India and China has slowed down given the overall economic slowdown in these countries, and gold production has slowly moved up given the higher prices. The lure of gold ETFs is also over.[PAGE BREAK]

Now, the key question that remains is whether the sharp fall in gold is a sign of deflationary times ahead. It is amazing how in just about two months’ time the worldview has changed from fears of excessive inflation given the scale of global monetary easing to talk of deflationary times now. I think it is difficult to exactly say yet whether we are moving to deflationary times, however, I do not see any shortage of either capital or resources or labour globally, which are the primary drivers of rampant inflation.

The commodity boom was primarily led by China, given its single-minded thrust on building infrastructure over the past one and a half decades to match global standards. As China decides to scale back its need for commodities to building infrastructure, the next wave in this sector can come only if either USA/Europe decide to rebuild their infrastructure or India gets the zeal and capital to build its infrastructure in an aggressive manner as China did. Otherwise, the story of a bull run in commodities is over. Mind you, gold was also a beneficiary of this boom. Only Indian buying cannot save gold prices from falling. The author believes that the bull market in gold is over for the long term and prices can correct slowly to USD 1200/oz over a period of time and to USD 800/oz over the next few years.

Source: Bloomberg

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