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Nicholas Brooks, head of research at ETF Securities, said investors may only be mid-stage in a bull market for commodities.
This is primarily because the world’s two largest economies, China and the US, are recovering, he said.
In the US, housing starts have improved and consumer confidence is high.
Unemployment is still at 7.8% but the Fed wants to reduce this to 6.5%, he noted. Meanwhile, business spending and retail sales are up in China, while the government has loosened its fiscal stance.
“It is a better environment for risk assets than the conventional wisdom would have you believe,” Brooks commented. “Commodities will do well as long as growth is rising, interest rates stay low and liquidity is good.”
Demographics support the bull argument, he said. As people become richer, they consume more. At the moment, those countries with low per capita consumption such as China, Brazil and India, also have large populations.
Brooks said: “It is not about growth rates per se. As long as these countries get richer over time and their populations stay where they are, you have a lot of demand coming.”In the meantime, supply will remain tight but Brooks does not foresee an eventuality where commodities – especially oil – will run out.
He said: “It will just be more expensive to get it out of the ground, but higher prices would stimulate investment and innovation in extraction, while helping to ration demand.”
Nevertheless, while the structural outlook is positive, Brooks warned there may be cycles in between and downside risks.
In particular, he is worried by lack of growth in Europe. Without it, countries like Spain and Italy will not meet their fiscal targets and their borrowing costs will shoot up.
Brooks said: “They never asked for the bail-out so they won’t have access to that unlimited buying of bonds. The risk here is really high and it will hit risk assets.”
Another problem is US demographics, he said. Social security and Medicare costs are forecast to go up after 2015 as the population ages, Brooks said. If nothing is done now, US debt will continue to rise.
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