Hymns for the non-believer
I can recommend the Kisschasy album, and the title serves as a more than apt summary of my views on the current commodities boom, however, the single “Opinions won’t keep you warm at night” is a salutary reminder that the daily moves in the stockmarket are hardly reinforcing the case for the sceptics at present.
The case for the resource believers is reinforced constantly, as the chorus of bullish sentiment from the media, stockbrokers and resource company executives provides more than enough material for writing the tracklist of “Hymns for the Believer”. Competition for superlatives remains intense as “stronger for longer” is superceded by South Australian Premier, Mike Rann’s “100 year boom” and Oxiana chief executive Owen Hegarty’s, ”stronger forever”. However, bowing to popular choices, the opening tracks would undoubtedly include:
- Stronger for Longer, and
- It’s Different this Time
The gist of the “believers” arguments is similar, but the central tenet is a demand led argument. Confidence in this demand argument stems from a number of re-inforcing factors:
- Chinese Economic Growth. After an extended period of extremely strong GDP growth (having not fallen below 7% since 1991), growth momentum has increased the confidence amongst most of the financial community and the general public, that growth will continue unabated. The primary reason for expecting continued growth appears to be extrapolation, however, the scale of ongoing capital investment and the expectation that the current era is the “once in a lifetime” industrialisation of the world’s largest population base are associated explanations.
- Decoupling. As the slowdown in western economies, particularly the United States, has challenged the traditional commodity price response (i.e. declines), the term “decoupling” has been coined. Met with rapid acceptance, this assumption centres around emerging market growth (particularly Chinese), being no longer dependent on developed market demand.
- India. With the large population base of China being a major driver behind the story, the potential for India’s similarly large population to act as further stimulus for the demand story is logical.
On the supply side, similarly emotive arguments add further fuel for the Believers:
- Inability to secure new supply. Whilst arguments on “peak oil” have been around for decades (and yet to be realised), the inability to add supply quickly in many commodities due to infrastructure and labour supply bottlenecks has fuelled concerns over the ability to add supply in the longer term.
The ability for these arguments to elicit an enthusiastic reaction amongst a large number of investors is obvious. Like all “booms” and potential “bubbles”, the arguments are easily understood and embraced. The opposing case for sceptics is perhaps more complex.
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.