david.fm

With Chinese car sales up 83.6% and Indian car sales up over 20% it is fairly clear that economies in emerging markets are developing - while in the US, stimulus apart, it is stagnating with high unemployment over 10%.
As Steve suggested on my video interview investment in emerging markets has been and will likely be on a roller coaster ride. This could leave investor vulnerable with little defensive and here is my take.

Economic growth will have an impact on commodity prices. My viewers know that I predicted oil at 80$ by the end of the year (we are very close) and recommended to entry the market at 50$ (when many analysts forecasted 35$ a barrel) and even at 65$ I affirmed it was still a buy (just browse the video archive to see what I said back then). Similarly I recommended an investment in Copper and Lead in April. As you can see from the graphics below both commodities did very well since then:

Copper up over 33% since then and almost 100% this year.

Lead up 47.16% since then and 113% (!) YTD.

Even a broader investment in industrial metals through the broader Rogers International Commodity Index Metal Total Return Elements ETN (similar to an ETF, tradable like a share) would have yielded an egregious +53.73% this year

I discussed RJZ even on twitter back in March

This doesn't mean that I do have special capabilities - or any gift to predict how commodities or the stock exchange with move in the future but clearly, with the dollar losing value vs. several currency, owning "things" has paid off in 2009.

With the increase in car sales and production in China, India and many other emerging countries there will be an increased demand in industrial metals and commodities. Obviously it is always difficult to buy at an high but other commodities, like Wheat, are still depressed and might represent a good investment opportunity. Similarly, Cocoa farmers, despite the current high prices, are unhappy about the price ¹ hence even a commodity in a rally like Cocoa might continue to raise.

Oil is in a similar situation where the supply and demand fundamentals are in favour of a price increase. Russian output is set to decline in 2010 and open has just raised its demand forecast for 2010
With supply not increasing anytime soon and demand increasing (how are we going to fuel all these new cars in emerging markets?) any temporary correction in the price of oil will not change the long term supply and demand fundamentals.

I have been asked about Gold: it is now at an all time high but I still think that, in a context where so much money printing has fuelled a massive liquidity on the market, it will still be a good investment in the years to come. Will it be the best investment in commodities ? Probably not as it is up around 20% this year and many other commodities, including Oil and Metals, did much better. This said it is still an excellent edge again the inflation that is inevitably awaiting us down the road.

Back to the question: owning commodities is by itself a defensive strategy. Printing new bonds or new shares is fairly easy. But creating new commodities from a finite set of resources it is simply impossible.

With so many ETNs, ETFs and ETCs it is now very easy to access commodities. Institutional investors, including Universities endowments, do include commodities in their portfolio. In my investment class whenever I discussed commodities it was, at least at sight, as if I had mentioned something obscure and arcane. Many students in our MBA are familiar with shares and bonds but know nothing about commodities (or they think so). In doubt of which commodity to buy the best approach is buying a broad index through an ETN like the Rogers International Commodity TR Index the index has returned almost 200% since 1998 outperforming shares and bonds by far.

For academic purposes I have also created the Maximus Commodity Index that is the first commodity index based both on European traded commodities and US ones. It has only five components but it is not second to others in terms of results: it is up 261% since 2002.

Sometimes the easiest investment ideas are the best ones. In an era where you cannot always trust auditors and rating agencies (Lehmann memories?) commodities like Sugar, Copper, Oil and Gold have achieved some stellar performance without waiting for a multi-million bonus at the end of the year or a billionaire bail out from the Government.