Posts Tagged ‘investing’

Commodities Investing: Demand, Supply and Speculation

July 24, 2011 2 comments

First published on BBeyond Magazine blog – an ultra niche publisher that caters exclusively for the global UNHW market and community:

An unsophisticated forecaster uses statistics as a drunken man uses lampposts –
for support rather than for illumination.

– Andrew Lang

The price of a commodity is determined by demand and supply. At least that is what most of us are taught in ‘Economics 101’. The relationship between supply and demand forms the cornerstone of economic models. The most fundamental concept in economics – price – is therefore a reflection of supply and demand. Or is it? Ask anyone who has traded Brent Crude or Light Sweet Crude (WTI) oil contracts and they will tell you the oil market is driven as much by speculation and momentum as it is by demand and supply. To put it in perspective, the CFTC (Commodity Futures Trading Commission) recently revealed that almost 95% of US crude oil futures volume is generated by day trading and OPEC president Mohammad Aliabadi noted futures contract trade an astonishing 18 times higher than the volume of daily traded physical crude.

The world’s population currently stands at 6.93 billion (and counting). It is expected to surpass nine billion by 2050. As such, there has been a lot of brouhaha about our capacity to accommodate the rising demand. The rise of emerging economies like BRIC (Brazil, Russia, India, China) has pushed the prices of commodities to new highs. In the post-2007 credit crunch economic climate, despite the possibility of prolonged spells of slow growth in the developed world, demand is expected to be robust. Chinese GDP per capita alone more than doubled from $3600 in 2001 to $7600 in 2011 and is forecast to surpass $12,000 by 2016. This is a large demand explosion and the question is: How quickly can supply response to that? The prices of commodities will thus be determined using supply-side fundamentals.

In India, 60% of farmers’ produce spoils before it reaches the market. The problem therefore is not supply per se, but infrastructure (which constricts the supply chain).  New technologies can lower production costs while increasing the supply of the commodity. A technology is classified as ‘disruptive’ when it significantly lowers the supply-demand equilibrium price while it simultaneously causes a surge in production capacity. For example, the natural gas market was hit by a disruptive technology in the form of horizontal drilling. Each horizontal rig can surge production by 5-10x the previous capability of vertically drilled wells. In the past, natural gas needed to trade near $6–$7 per mmbtu (million British thermal unit) to encourage new production. Now natural gas is expected to remain under $5.50 per mmbtu for the foreseeable future. The key to successful commodities investing is to spot these disruptive technologies in the wings.

The ideas in this blog post stem from a panel discussion on Commodities Investing the author recently attended at JP Morgan, London. Chartered Alternative Investment Analyst Association sponsored the event.



Are Malaysian funds underperforming?

March 29, 2011 Leave a comment

On my recent visit to Malaysia, I spoke to ordinary Malaysians and asked them how they invest their cash savings. Most complained of the poor performance of Malaysian mutual funds. With the KLCI and emerging market equities on a bull run (off the back of a financial recovery), I was interested in finding out why…

Aside from the three big boys – EPF (Employees Provident Fund), Khazanah (Malaysia’s Sovereign Wealth Fund) and PNB (unit trust operator and largest Malaysian fund) – the typical Malaysian fund size is about RM150 million (USD $50 m), which means there’s no economies of scale, market-moving power or real diversification. Most are under-subscribed. Individual fund managers handle up to 10 funds each, so there’s little to really differentiate each fund’s asset allocation or investment style. There are also some potential ethical conflicts, as most of the bigger fund management companies are owned by local banking groups – guess the biggest equity holdings in their portfolios?

There are nearly 600 mutual funds on the retail market, for an adult population of 11 million with maybe only about two million who actually have the discretionary saving power to invest. I’m not surprised people are finding returns disappointing. The problem is there are few alternatives – bank deposit rates are just 50bp above inflation.

*Hishamh contributed to this post. Hishamh is an applied and practicing economist in the Malaysian financial sector.


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