Another look at commodities
Commodity price rise – both a market positive and a market risk.
At the same time on a global basis, many investment strategists are citing this ongoing inflationary rise in prices as the single biggest risk for markets. Rising inflation demands higher interest rates.
While there is some concern that many emerging markets are not being enough in raising interest rates, so far India, Indonesia, Thailand and South Korea have raised their interest rates this year.
Also China today announced an uptick in its core interest rates for the third time in four months. The People’s Bank of China announced that it would raise the one year deposit rate by 0,25% to 3% and the lending rate by 0,25% to 6,06%.
This had a dampening effect on global markets, but at these early stages it is not enough to turn the more bullish sentiment.
Global money supply
Is there is direct link between global money supply and rising commodity prices? We do know that the liquidity created around the world post the 2008 financial crisis was on an unprecedented scale. Now 2½ years later we are seeing the aftermath of this liquidity in rising prices.
The chart below reflects the exponential rise in country reserves, including the current $2,4 trillion on the balance sheet of the US Federal Reserve.
Chart - global reserves
BCA Research put out a note saying that at $100/barrel, the higher price of oil is not yet having a negative impact on the demand for oil and they are still bullish on energy shares. Locally there is really only one direct recipient of higher oil prices – Sasol – the coal and gas to liquid company.
Sasol has a market cap of R240 billion. The company announced at the beginning of February that its expected half year results to December are estimated to increase by 17% to 27%. For the full year to June Inet have broker consensus earnings up 13,6% in 2011, 20% in 2012 and 16% in 2013.
BCA Chart : Oil spend as a percentage of Nominal GDP
At the same time as the chart above indicates the global energy consumption as a percentage of GDP remains below the 2008 high.
According to their findings, energy prices are sustainable at today’s prices and are set to move higher.
Chart wheat price
Chart sugar price
Chart copper price
Commodity companies on the JSE
With the large weighting of Anglo American, Billiton and Sasol in the overall market, the weighting to the Resource sector for the JSE All Share index has always been high.
At certain times, the resource index has moved sharply away from the overall index, as we saw in 2007 /2008. Over time investors in the more volatile resource sector have been rewarded, but it is not that clear whether this additional return has been commensurate with the additional volatility sustained.
Because the large companies, Anglo American and Billiton are essentially global companies, the two main drivers for local investors are the profitability of their basket of commodities plus the impact of the currency relative to the US dollar, which is the currency commodities are priced in.
Resource index relative to JSE All Share index from January 2000
An ongoing rise in commodities together with some rand weakness could translate into a double whammy for locally listed resource shares.
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