Emerging markets' appetite for natural resources is key to upsurge

Although uncertainty prevails on global stock markets, taking a selective approach to natural resour...

Although uncertainty prevails on global stock markets, taking a selective approach to natural resources appears to be a resilient strategy.

I believe three main tenets underpin this positive conviction: population growth, infrastructure demands and compelling valuations - with none of these facing the prospect of a reversal in the near future.

Oil may have dipped recently but not a week passes without intense oil price conjecture and resulting end-of-the-world-as-we-know-it dysphoria. But its price is not so much governed by mere speculation. I cite a combination of production problems and geopolitical issues as being the main factors - little spare capacity in Saudi Arabia, Nigeria and Mexico, and the potential of scuffles in Iran. Not forgetting demand such as the rapid profusion of cars in China.

Obviously, the current high price would rocket even further if there actually were (more) conflict in the Middle East, and it would probably take some time for this to recede, even if fears were largely unfounded. New oil production is also a real problem as it requires billions of dollars of investment and Western companies do not often have access to the key oil pockets. This situation is made worse with nations taking a more covetous approach - often for self-preservation reasons - as is evident with the ongoing skirmishes between BP and its partners in Russia.

Adding to the frail bottom line: even if Saudi production was increased soon, the likelihood is that the extra flows would be consumed locally and never make it to the pumps in the West. So, for as far as we can look ahead, the prospect of high price oil is increasingly plausible.

One cannot speculate about a continuing commodities boom without acknowledging the underlying reasoning for the surge. And this demand is energised by fast-growing populations and the infrastructure needed to support their evolving needs.

Consider that after World War II the global population nestled around the two billion mark, and now hovers around seven billion. This is rising by 70 to 80 million a year, and most of all within emerging markets - those with the most voracious appetites for natural resources.

It is a self-propagating cycle: as the huge drift to the cities accelerates (urban populations: India 29%, China 40% and the US 81%) more steel is needed to build the new railways, more coking coal is needed to smelt the steel and more energy (coal/oil/uranium/other) is needed to power the railways and the new homes.

And all of this has little to do with credit crunches, recessions and belt-tightening around the world as they are largely government-mandated projects. These will continue as nations recognise the need to spend on their infrastructures to further increase their wealth, irrespective of short-term blips.