Best yet, commodities are an indirect play on the only region of the world that is experiencing explosive economic growth--Asia.
The heavily indebted West faces years of sluggish growth and a dismal outlook for job seekers. But for commodities the story is decidedly more upbeat, because commodities are the basic raw materials of urbanization and industrialization. Today, hundreds of millions of people are rising out of extreme poverty and, for the first time in recorded history, becoming global consumers, a good news story for commodities.
Consumers in the West had enjoyed a more than 20-year bonanza, one where real estate prices steadily climbed, interest rates fell and employment prospects were good. But today, in the wake of the global financial crisis of 2008-2009, most consumers are deeply in debt and so too are their governments.
Governments around the world have poured trillions of dollars into stabilizing their national economies, yet unemployment rates remain high in the West and economic growth is tepid. Western economies are in rehab after a 20-year run on a debt-fuelled bender. Recovery is likely to be painful and slow as these economies shed the bad habits of racking up too much debt and saving too little.
Conversely, Asia's economy is rising and the prospects for commodities are rising along with it. China and India went into the global financial crisis of 2008-2009 in much better shape than the West. These emerging market economies had much lower levels of national debt, lots of foreign currency reserves and consumer sectors that were in their infancy. At the beginning of 2010, China had a total debt-to-GDP ratio of 159%, while the United Kingdom's was an eye-popping 466%--a nearly threefold difference. Is it any wonder that Asia's growth remains unrestrained, while Western growth is sluggish?
The investment opportunities of the future will increasingly come from the fast-growing economies of Asia, not the stalwarts of the West. And that's good for commodities, the real stuff that makes economic expansion possible.
The West has gorged on too much debt for too long. The repercussion of this binging will be years of slower than normal economic growth as the economies of the West are rebuilt. Between 2000 and 2009, U.S. stock market returns were negative and joblessness rose dramatically.
While economic growth in the West has begun, it's being driven by the government sector rather than by corporations or consumers. The unemployment rate remains stubbornly high and consumers are sitting on their wallets, terrified of getting walloped again. Can the traditional investment mix of stocks, bonds and real estate really be expected to outperform in this low-growth environment?
Nope. During the 1970s, commodities roared while stocks and bonds went nowhere. During that decade, America was strong, Europe was re-emerging as an engine of global growth and the economies of South Korea, Japan and Taiwan were on the move. This time around, four-fifths of the world's population is emerging from an economic funk -- creating hundreds of millions of new global consumers. Demand for commodities continues to surge. There are no substitutes for these critical feedstocks of industrialization and urbanization, and supply remains constrained. A powerful rallying cry will be heard around the world as investors clamour to be part of the next great bull market -- not in stocks, bonds or real estate, but rather, in commodities.
Today, many of our banks are a mess, and both the consumer and the American government face years of painful deleveraging as they try to work off the excesses of a debt-fuelled bender. With government and consumers in debt up to their eyeballs, the prospect of a slow-growing economy looks increasingly likely. This economic restraint will slow investment, profits and payments to investors in the form of dividends and interest. As America, and much of the West, enters a slow-growth era, buying a basket of S&P 500 stocks looks increasingly like a sucker's bet. Commodities, fuelled by the fast-growing economies of Asia, should be the go-to sector over the next decade.
Bell bottoms and disco may never stage a comeback, but we may be going back to an investment climate like the 1970s, when commodities soared and just about everything else tanked.
In spite of the crucial role commodity producers play in enabling the global economy, most of us know almost nothing about them; and what we do know is often jaundiced. In a world of glitzy new product launches and expensive marketing campaigns, the world of industry seems woefully out of date. Yet we have just lived through an era where Wall Street and its world-class marketers badly misled the investing public about the riches that lay ahead in cutting-edge technology and high finance.
Commodities can soar when stocks and bonds are going nowhere and inflation is running amok. In a world of too much complexity and too few solutions, investors are looking for something simple, something tangible, where the accounting isn't flawed and the path forward is clear. As real things that you can hold and touch, things that you use everyday, commodities seem to be the solid store of value in these troubled times.
The tried and true investment path led many investors to ruin in the 2008-2009 market collapse. What worked before is unlikely to work again. The world has changed and so too has investing. Commodities zig when stocks and bonds zag, and this often-overlooked but crucial part of the investing landscape is finally about to get its due.
Source: Financial Post
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