Despite the slowdown in the global economy, commodity prices have continued to strengthen. Oil price...
Despite the slowdown in the global economy, commodity prices have continued to strengthen. Oil prices at close to $100 per barrel have dominated headlines of late.
This, in part, is a result of demand from India and China, where spending on internal infrastructure is generating massive demand for resources. The general slowing of worldwide growth compared with the ongoing strength of oil and materials prices shows that the market has underestimated this level of demand.
From a US domestic perspective, the trend in rising energy prices also extends to natural gas, which has already soared over 20% in 2008. The need for more power generation is responsible. While coal remains available, environmental concerns have resulted in the building of fewer coal-fuelled stations than previously expected.
Gas stations benefit from a higher standard of environmental cleanliness, and the fact that they are quicker to build. These factors increase the potential for the price of gas to rise more rapidly even than that of oil over the next few years. As a result, the energy sector's strong performance should continue.
We are also seeing a sharp increase in demand for food from the world's developing nations, with a corresponding rise in the need for animal feed and fertilisers. Food prices have risen dramatically in recent months. The biggest-ever one-day increase in the price of wheat (20%) occurred in February. Kazakhstan, one of the largest exporters of wheat, had said it would soon impose limits on overseas sales. Global supplies are low, after crops from other major producers were weather-damaged, leaving the US experiencing record demand.
Lack of investment in fertiliser distribution by emerging economies has also become a major concern. There is an urgent need to fertilise far more land and, while farmers strive to increase their yields, little additional supply is available. This leaves US fertiliser companies in a very strong position.
As the fundamental factors underpinning demand for natural resources should remain in place, these sectors are being seen as a relatively safe play despite the economic downturn. As a result, natural resource company share prices should continue to benefit in the coming year.
- Commodity prices set to remain strong in line with demand;
- US energy stocks benefiting hugely from increased domestic and emerging requirements;
- Food and resource prices are rising in line with escalating needs within US and globally.
By Simon Moss, investment director, US equities at Scottish Widows Investment Partnership.
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