Davos '08: Commodities Play With The Globalization Game
Holmes is among those who is also fairly bullish on agricultural commodities, again because of China, where he notes the desert is growing, “ a real serious issue” when it comes to food production, and a drought in Australia. For that reason, Holmes likes fertilizer producers like Mosaic because they can increase cop yields. His firm has also “bought corn and wheat.”
Martinez-Diaz echoes that point, saying agricultural commodities have more “shocks and uncertainties", which support prices.
Merrill Lynch’s global emerging markets equity strategist Michael Hartnett says the firm remains positive on agricultural commodities, along with precious metals and oil, but is negative on industrial metals because they’re “more vulnerable to the economic downturn.”
Global Outlook For 2008
That is the wild card for both commodities and emerging markets in 2008.
Conventional wisdom says a US recession and a slowdown in Europe would have a sizable effect, “making it very, very tough for emerging markets and commodities to go up,” says Hartnett.
“The domestic demand story in emerging markets is more independent and more sustainable than in the past,” he says, adding that one theory holds that a US recession would helps cool inflationary pressures in places where growth has been too strong, thus at “some stage you’re going to get another buying opportunity.”
Hartnett notes that many emerging market indices are already pretty far off their October 2007 highs.
Holmes agrees, saying any US-European effect will be temporary, such that “emerging markets have a big rebound after a correction.”
Any global slowdown won’t affect all emerging markets equally, especially given China’s unique role in the global trade equation, serving as both an enormous producer and consumer.
Hartnett sees the most insulated markets such as Middle East oil producers, Israel Russia, India and Malaysia as the most resilient with big trade countries like China and Brazil the most vulnerable.
“I think the case is still strong over the medium term that they will be very good places to invest,” says Robert Hormats, vice chairman of Goldman SachsInternational and a frequent Davos attendee. "They’re more and more integrated into the global country. They get the benefits and they also get the negatives. At the same time, they’re in a much more robust condition to withstand that than a decade ago.”