“Equity markets asleep at the wheel,” says Standard Chartered’s Global Head of Equities Commodities Research
Speaking at this week’s Bloomberg Hedge Funds Asia Summit in Hong Kong, two leading Asia-based commodities hedge fund managers agreed that supply issues would create higher commodity prices over the mid to long-term. Jason Wang, CEO of Singapore-based Iridium Asset Management, whose Iridium Alpha Fund focuses on commodity-oriented equities, said there was definitely a case for commodity prices climbing long-term, but suggested near-term headwinds may exist. “Copper is trading at near-record highs - USD3.85 per lb and that large risk premium over the marginal cost of production discounts any potential supply disruptions in the short-term,” said Wang. “The fact that import arbitrage between LME stockpiles and Shanghai stockpiles has been closed for a large part of the year means you should be wary of a potential pullback in copper prices.” A potential short squeeze on the US dollar could also cause copper prices to fall in the short-term. Panellist Jeremy Gray, Global Head of Equities Commodities Research, Standard Chartered, was bullish on where the markets are going, particularly copper and iron ore. “95 per cent of budgets were cut in 2008, which has left a massive void and it needs to be filled,” said Gray.
Volatility in commodities has been evident, with U.S. corn prices last week reaching a two-year high of USD5.8425 per contract against a weak greenback. If China’s GDP grows at an expected 7 to 8 per cent in 2011, relative to 0 to 2 per cent for the U.S., Mike Coleman, Managing Director of Aisling Analytics, one of Singapore’s biggest hedge funds (USD1.2 billion Merchant Commodity Fund), said that certain GDP-sensitive soft commodities like rubber and cotton “could run into some demand headwinds as we head into next year.” “I think we’re transitioning from a structural bear market into a more structural bull market so food price inflation will become an issue again.” In Gray’s opinion, the big potential for commodity price hikes is being lost on the markets: “I think equity markets are asleep at the wheel and don’t understand just how high some of these commodities will go. Rubber and cotton are the only commodities that are through their ’08 high.” As to where investment opportunities lay, Coleman said that commodities with a strong supply issue, like agriculture, would be very interesting next year, whilst “petroleum might struggle”. “Copper producers like Antofagasta are factoring in USD4.00/lb spot prices and starting to look slightly expensive,” said Wang. “My view is that we see prices higher in the long-term. Near-term I’ll be positioned defensively across the commodity suite.” Gray thought mining equipment producers were an attractive option to buy. “There’s a $200 billion backlog of orders right now,” said Gray.
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