Asian commodities, loan funds, property strong performers
Umesh Pandey | Saturday, 14 June 2008
INVESTORS in Asia who have been punting on the region's growth story are likely to continue to benefit going forward, as the demand for commodities abundantly available in the region should persist, while agriculture and property are likely to be strong performers in the near future.
"We are bullish on all commodities due to the demand seen in China, India and Russia, and most of the commodities except agriculture had underperformed until recently," said Scott Campbell, director of Midas Capital, a $6-billion fund management firm.
"Agricultural commodities prices have gone up in the past few weeks but they are still way behind the other commodities such as oil and gold, and I still see the agricultural sector having steam to move up," he said.
Mr Campbell - who shocked his audience at a Bangkok conference 18 months ago by saying that oil would hit more than $80 a barrel - said the time was drawing near for the black gold to lose its glitter and that there would be some "air pocket" that may offer opportunities for investors. But until that phase occurs, investors should focus on more tangible commodities such as agricultural goods.
He defines an "air pocket" as a phase when prices drop between 15 per cent and 30 per cent.
"We continue to be bullish on the agricultural sector and although there may be some pullback in case other commodities decline, the long-term trend for the commodities market remaining strong," he said.
He said that despite the boom that was being witnessed in the oil-related commodities, his view was that this was bound for a sharp correction, a correction that may drag other commodities such as gold along with it.
The reason, he says, is a sharp rise of about $500 billion worth of new ETFs (exchange-traded funds), which are basically buying commodities that are related to oil.
"Look at every city in any developed country, and they are setting up funds to buy oil-related ETFs when they should have been there months ago," he said, adding that it was more a case of speculation that was building up and eventually the bubble would bust.
Another area where his firm is looking to invest is leveraged loan funds, an area that offers a relatively high order of the asset class but has seen a drop of around 30 per cent so far this year.
Mr Campbell says that by buying these assets, the firm is guaranteed a coupon of about 7.0-8.0 per cent and then on top of that there is the potential for gains of 25-30 per cent in capital in the longer term. His firm has doubled its exposure to 20 per cent from 10 per cent of the portfolio in this kind of debt-related instrument.
Apart from the focuses on commodities and some debt, he says another area that investors should look into is property, since Asia is seeing a boom in urbanisation - it is expected that 60 per cent of the region's population will be living in urban areas by 2030 from 13 per cent in 1900. The United Nations also estimates that 85 per cent of this population will be living in emerging markets.
"Our pick is still that the East would be better than the West in the property sector," he says, adding that the prices in the region are still not that high when compared to the other parts of the world.
"The rises in the prices have taken some of the upside that you may get but the potential for the long term is relatively good."
Citing the Japanese market as one example, he said that rental rates in Tokyo's downtown area had risen by 10 per cent in the past two years but the increases had not been reflected in the stocks or the REITs (real estate investment trusts) that are traded there. With interest rates at rock bottom in Japan, he says investors such as himself are tempted to take out loans and invest in such assets to make good returns.
He contrasts the Tokyo market with property prices in the United Kingdom, which have pulled back by 10-15 per cent this year. In his view they may fall by another 10-15 per cent next year and then decline slightly in the following year before picking up, indicating no rush to go out and buy assets so early in that part of that region.
Mr Campbell also believes that concerns about inflation in the region are overblown since prices would taper once oil prices settled down.
Commenting on the outlook of major global equity markets, he said the next 18 months were going to be a painful period because the United States was going to start to feel the heat of the crisis it was undergoing. He added that until recently most global financial firms had been concentrating on clearing up their balance sheets and had not bothered about retail consumers. But with the credit crisis lurking in the retail segment, non-performing loans are set to surge, especially in the credit-card segment.
"If you look at the current crisis in the West, it is what Asian countries underwent in 1997-98," he said, adding that there would be some painful lessons that financial institutions needed to learn.
This, he points out, is not an issue in Asia, where financial institutions have learned their lessons and built strong balance sheets. "If you are thinking that the current crisis in the global markets is going to lead to a 1929-style crash, then it is not the case. There is no Armageddon that is forthcoming."
His firm has kept just over 20 per cent of its portfolio aside, in case opportunities arise in the weeks or months to come.
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The Bangkok Post
"We are bullish on all commodities due to the demand seen in China, India and Russia, and most of the commodities except agriculture had underperformed until recently," said Scott Campbell, director of Midas Capital, a $6-billion fund management firm.
"Agricultural commodities prices have gone up in the past few weeks but they are still way behind the other commodities such as oil and gold, and I still see the agricultural sector having steam to move up," he said.
Mr Campbell - who shocked his audience at a Bangkok conference 18 months ago by saying that oil would hit more than $80 a barrel - said the time was drawing near for the black gold to lose its glitter and that there would be some "air pocket" that may offer opportunities for investors. But until that phase occurs, investors should focus on more tangible commodities such as agricultural goods.
He defines an "air pocket" as a phase when prices drop between 15 per cent and 30 per cent.
"We continue to be bullish on the agricultural sector and although there may be some pullback in case other commodities decline, the long-term trend for the commodities market remaining strong," he said.
He said that despite the boom that was being witnessed in the oil-related commodities, his view was that this was bound for a sharp correction, a correction that may drag other commodities such as gold along with it.
The reason, he says, is a sharp rise of about $500 billion worth of new ETFs (exchange-traded funds), which are basically buying commodities that are related to oil.
"Look at every city in any developed country, and they are setting up funds to buy oil-related ETFs when they should have been there months ago," he said, adding that it was more a case of speculation that was building up and eventually the bubble would bust.
Another area where his firm is looking to invest is leveraged loan funds, an area that offers a relatively high order of the asset class but has seen a drop of around 30 per cent so far this year.
Mr Campbell says that by buying these assets, the firm is guaranteed a coupon of about 7.0-8.0 per cent and then on top of that there is the potential for gains of 25-30 per cent in capital in the longer term. His firm has doubled its exposure to 20 per cent from 10 per cent of the portfolio in this kind of debt-related instrument.
Apart from the focuses on commodities and some debt, he says another area that investors should look into is property, since Asia is seeing a boom in urbanisation - it is expected that 60 per cent of the region's population will be living in urban areas by 2030 from 13 per cent in 1900. The United Nations also estimates that 85 per cent of this population will be living in emerging markets.
"Our pick is still that the East would be better than the West in the property sector," he says, adding that the prices in the region are still not that high when compared to the other parts of the world.
"The rises in the prices have taken some of the upside that you may get but the potential for the long term is relatively good."
Citing the Japanese market as one example, he said that rental rates in Tokyo's downtown area had risen by 10 per cent in the past two years but the increases had not been reflected in the stocks or the REITs (real estate investment trusts) that are traded there. With interest rates at rock bottom in Japan, he says investors such as himself are tempted to take out loans and invest in such assets to make good returns.
He contrasts the Tokyo market with property prices in the United Kingdom, which have pulled back by 10-15 per cent this year. In his view they may fall by another 10-15 per cent next year and then decline slightly in the following year before picking up, indicating no rush to go out and buy assets so early in that part of that region.
Mr Campbell also believes that concerns about inflation in the region are overblown since prices would taper once oil prices settled down.
Commenting on the outlook of major global equity markets, he said the next 18 months were going to be a painful period because the United States was going to start to feel the heat of the crisis it was undergoing. He added that until recently most global financial firms had been concentrating on clearing up their balance sheets and had not bothered about retail consumers. But with the credit crisis lurking in the retail segment, non-performing loans are set to surge, especially in the credit-card segment.
"If you look at the current crisis in the West, it is what Asian countries underwent in 1997-98," he said, adding that there would be some painful lessons that financial institutions needed to learn.
This, he points out, is not an issue in Asia, where financial institutions have learned their lessons and built strong balance sheets. "If you are thinking that the current crisis in the global markets is going to lead to a 1929-style crash, then it is not the case. There is no Armageddon that is forthcoming."
His firm has kept just over 20 per cent of its portfolio aside, in case opportunities arise in the weeks or months to come.
..............................
The Bangkok Post