16/06/2008
Emerging Inflation
Sharp rises in food and energy prices are causing consternation amongst policy makers, not only in the UK but especially emerging economies. The Commodity Research Bureau (CRB) index of some 20 widely traded commodities has risen about 40% in less than 18 months. Could this continue? Bullish investors would argue yes! After all, since 1792 there have been five major commodity bull markets, lasting an average of 19 years. The current commodity market has so far lasted barely eight.
One reason for a longer lasting boom is the nature of demand for raw materials. Typically, when a major nation industrialises, for example the US or the UK, this causes a multi-year upward trend in commodity prices. Today, rapid urbanisation in India, China and other large countries is causing a massive draw on global resources.
As well as industrialisation, a low cost of capital has been a strong driver of growth in many emerging countries. Larger trade surpluses and falling debt levels caused a re-assessment about the yield on emerging market debt, helped by some countries such as Brazil achieving investment grade status. A lower cost of capital has also allowed many emerging economies to grow strongly.
The global economy is inter-linked though. While primary commodity producers in Latin America, Russia, and the Middle East are currently reaping the benefits of long term urbanisation and infrastructure spending, the key issue will be whether the US and European economies enter deep recessions, in which case end demand for Asian products would slow considerably.
Central bankers in both OECD and emerging market economies face a policy dilemma. Normally, as the OECD slows down, commodity prices fall. As this is not yet happening, inflationary pressures are being seen, just at the time when many distressed companies and households call for monetary policy to be loosened. Food and energy usually make up about 15-20% of the inflation basket in OECD countries, but more like 40-50% in many emerging markets. As expensive fuel subsidies and price controls are removed, for example in India, Indonesia and Malaysia, headline inflation is surging. Monetary policy must tighten in many emerging economies, making country selection very important indeed for investors choosing between those producers and consumers that are on the right or wrong side of the commodity equation.
Jason M. Hepner, CFA – Investment Director, Global Strategy, Standard Life Investments
This was published in Investment Week on 16th June 2008.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
Standard Life Investments may record and monitor telephone calls to help improve customer service.
All companies are authorised and regulated in the UK by the Financial Services Authority.
©2008 Standard Life Investments.
RSS Press Articles