Switch to soft will see commodity boom continue
Investors should not be concerned about rampant commodity prices or temporary corrections, believes Philipp Vorndran. “I am calling on private clients not to reduce exposure to commodities. People who are talking about a bubble in commodities have not realised the underlying power of the commodities boom,” he says. “It is not a cyclical story, it’s a long to medium-term story of supply and demand mismatch.” What investors need to be wary about, he says, is regarding commodities as a single asset, rather than a varied asset class, and he forecasts a switch in allocations away from metals and energy towards soft commodities, such as sugar, cocoa and coffee. “Over the next 12-18 month period, a dramatic increase is expected in soft commodity prices. Talking about ‘commodities’ is just the same as talking about equities, bonds or currency. We are still at the very beginning of a new asset class developing. Three years ago, we were talking only about commodities. Today, we are talking about energy, precious metals and soft commodities. In another three to five years, we will talk separately about copper, timber and pork bellies. This asset class is still far from being mature.” Yet in the long term, Mr Vorndan sees significant risks for raw materials, which may lead to the “brutal” reallocation of portfolios. The brutality could come from huge price swings, from markets, which are not functioning correctly due to political interference, or from military action. Although he expects eventual US military action against Iran, he thinks this is still 15 years away. “We are still in the midst of negotiations, and the EU has taken on a very important role,” says Mr Vorndran. “But perhaps we have already passed the moment where we have the courage to act against a country, which is an important supplier of energy and commodities, because we are so dependent on them.” The greater, short and medium term risk to investors in energy markets is the behaviour of political leaders, believes Mr Vorndran. “Mr [President Hugo] Chavez in Venezuela, the way he behaves is a lot like a hedge fund manager. Vladimir Putin in Russia and the leaders of Bolivia, Ecuador and Peru, they all act in the same way. They are solving their financial problems by increasing their grip on local commodities through renationalisation. This means the risks for commodity investments – for companies – have increased dramatically. Due to this renationalisation risk, resources infrastructure investments are not taking place.” Despite a 40 per cent risk of Italy exiting the euro – due to Silvio Berlusconi’s severe mismanagement of the economy – Mr Vordran also recommends a strong allocation to European equities. Yet this does not square with his view that the economic dynamic in Europe is “not looking very rosy.” These economic fundamentals are not important, he stresses. What is important is that the fastest growing European companies are not making profits on their door-step, but from the much faster moving economies of the emerging markets.
