Once thought to be a cyclical investment, commodities have earned a permanent place in institutional investors’ strategic asset allocations due to the growth of emerging market economies, according to Philipp Vorndran, senior strategist for the asset management business of Credit Suisse. Other factors have contributed to the strength of commodities, including supply-side limits and geopolitical trends, but the role of emerging markets has been the dominant factor, he said in a conference call.
“The dramatic migration of people [in emerging market countries] from rural to urban settings has greatly impacted the commodity market,” Vorndran said. Because India and China’s populations are so huge, the expanding and increasingly prosperous middle class is pumping a massive amount of money into the domestic economies. Home building, for instance, has driven increased demand for metals. The middle classes also want higher quality food, he observed, adding that beef should be a profitable investment.
Supply-side limits, especially with oil, will push up prices. Vorndran predicted that 2008 would be a peak year for oil production in the North Sea, which contains some of the most efficient oil in the world. Supply is expected to peter out by 2015, and therefore in the near term North Sea oil is a great investment opportunity. After 2015 consumers will have to rely on lower quality oil from the Middle East.
Private and institutional investors have “started to diversify away from paper money and into commodities and real assets,” Vorndran continued. Real estate inflows have rocketed, but many investors started to worry about a potential bubble as far back as 2000. “Investors thought about an asset class that could give them the same risk/return ratio in their portfolio,” Vorndran said, so they have turned their attention to commodities.