FINANCIAL OUTLOOK 2008(ZT)
FINANCIAL OUTLOOK 2008
City experts give us their top predictions
SCHRODERS: COMMODITIES TO BENEFIT FROM MARKET TURMOIL
Christopher Wyke, Commodity Product Manager
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• We expect commodities to perform well over 2008
• Commodities are anticipated to benefit from turbulence in other financial markets
• We believe that commodities will grow increasingly popular as a portfolio diversifier
Strong demand for natural resources - particularly from developing economies - should remain a key support of rising energy, metals and agriculture prices.
Additionally, on the supply side, many inventories are at, or close to, record lows. Furthermore, the quantity of the world's arable land continues to steadily decline due to issues such as desertification and urbanisation within developing countries.
In sharp contrast to the turbulence witnessed in the equity and bond markets, many commodities performed strongly when the sub-prime mortgage market woes were at their peak during the summer.
Given that many analysts are predicting that the period of heightened volatility is likely to extend over much of 2008, this furthers our positive outlook on commodities.
In addition, this asset class tends to do well in periods of rising inflation and political uncertainty - events which tend to depress other asset classes, such as equities and bonds.
Energy
Oil prices continued to make new highs during the latter months of 2007. Inventories have struggled to keep up with relentless demand and any hint of interruption to supply has triggered a surge in price.
A variety of geopolitical factors have also maintained upward pressures on prices. We remain confident that energy prices will continue to contribute well to the asset class's overall performance in 2008.
Metals
Within the metals sector we strongly favour precious metals. High inflation, heightened volatility in the financial markets and a weak dollar look set to support further price rises for gold. Other precious metals - such as silver and platinum - have also seen similar price surges and we expect further gains in 2008.
Within base metals, there are fewer, but selective opportunities. Since the 60-year low in 1999, copper prices have experienced strong gains on the back of ongoing growth in developing economies.
We expect this trend to continue over the medium term. Elsewhere, lead prices look set to prosper due to increased demand and constrained supply. Similar fundamentals are apparent in the tin market, with strong demand coming from Japanese and other Asian steelmakers.
Agriculture
Within the grains sector, we expect corn and wheat to continue to deliver the best returns, while in materials and fibres, we continue to believe the prospects for US cotton prices are good.
We remain bullish on the oilseeds sector, particularly the soybean crop. Demand - especially from China - is anticipated to continue to exert pressure on supply.
Elsewhere in the oilseeds sector, the outlook for palm oil is attractive. In terms of use, it is the fastest growing vegetable oil in Europe given that it is a non-trans fat oil and a major source of bio-diesel in Asia. We expect selected holdings within the soft commodities sector to do well over the coming months, particularly coffee.
As a result of increased demand from both developed and developing countries coffee reserves are now less than 13pc of annual global consumption. This is the lowest level ever recorded, thus leaving the price vulnerable to any weather-related supply disruptions. We also favour positions in the orange juice and cocoa markets.