Although China’s growth rate has slowed for seven successive quarters, it still continues to advance at a faster rate than the world’s other major economies. Nevertheless, with the commodity market being so heavily reliant on demand from China, this period of slower growth is causing many commodity analysts to panic.
French bank and global investment management service Société Générale, however, maintains an optimistic stance on China’s growth prospects, indicating in a recent report that “positive momentum” will see things pick up this upcoming year. “Recent data points to a turnaround in the China growth story, boosted by government-led infrastructure spending. Asia’s export contraction looks to be turning a corner, demand is picking up [and] restocking is approaching.”
Graph 2 shows a rundown of GDP growth figures and illustrates why some believe emerging markets will return to prosperity. The data, which comes from the Organisation of Economic Co-operation and Development’s most recent economic outlook report, predicts that emerging countries, along with South Africa and Indonesia, are all likely to regain momentum over the next two years.
Duncan Hughes, head of research at RFC Ambrian, the specialist resource sector advisory firm, anticipates that, despite a slight blip in demand, growth in Bric countries will drive commodities for many years to come. “There is no doubt that commodity markets have fallen back from peak levels, but we believe we are still well and truly in the super cycle and that the recent decline in demand is just a bump in the road,” he says.
“Consumption levels of almost all energy and mineral commodities are still well above where they were 10 years ago. While supply has now caught up in most commodities, this still creates much faster depletion of resources and a higher ongoing need for investment in the exploration and development of replacement resources each year.”
A helping hand
Spreading risk by accessing a range of commodities through a pooled investment is a sensible option for non-experts. Because of the cyclical nature and general instability of individual commodities – each commodity category has historically experienced different growth cycles and supply/demand imbalances – funds offer the obvious benefit of diversification and the expertise of a fund manager who understands the market.
The UK stock market has a high exposure to commodities with about a third of the FTSE 100 consisting of commodity-related stocks. The share index of the 100 highest market capitalisation companies listed on the London Stock Exchange includes 17 oil and gas companies and 13 dealing in basic materials.
