Commodity Super-Cycle and Decline

http://www.business-standard.com/

Analysts’ prediction that 2014 would be a bad year for emerging markets didn’t play out. The numbers show that developing-country stock markets performed better than those in the advanced economies

Remember how this time last year a lot of analysts were predicting that 2014 would be a bad year for emerging markets? Didn’t really happen, did it? Now I hear economists saying the reckoning they’d expected has only been postponed. It’ll happen next year instead. It’s possible, but I wouldn’t bet on it.

In this discussion, one crucial fact is both obvious and usually forgotten: the so-called emerging markets are all quite different. They don’t move in unison. Take the impact of cheaper oil. Just as in the advanced economies, it’s good news for some (the equivalent of a tax cut) and bad news for others (the equivalent of a cut in income). It’s unhelpful to generalise. Many of the world’s star performers in 2014 were emerging-market economies. The same will be true in 2015.

The fallacy of agglomeration is compounded by a failure to grasp relative scales. Taken together, the two errors give a distorted picture of global activity.

The slowing of China’s expansion is a constant theme these days. Yes, but remember that China will be a $10-trillion economy by the end of 2014; that during the course of this year’s slowdown, it added roughly $1 trillion to world output; and that slowing growth in China is still quite rapid by most countries’ standards.

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http://www.businessweek.com/

After spending $1 trillion since 2002 on projects to feed China’s commodity boom, the world’s mining companies have a lot riding on their biggest customer.

While commodities may be trading at five-year lows, the heads of three top miners BHP Billiton Ltd. (BHP), Vale SA (VALE3) and Rio Tinto Group (RIO) last week all backed China, the world’s second-biggest economy, to keep buying increasing amounts of their products deep into the next decade. Not everyone agrees.

“The commodity guys are just too optimistic,” Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong, said in an interview, without referring to particular companies.

As China moves to a consumer-led from an investment-led economy, there may be a substantial absolute drop in commodities demand, not just slower growth, he said. “This is happening now,” Tao said. “It’s just people are covering their eyes and refusing to believe that what is happening now is not just a cyclical story, but also a structural story.”

Goldman Sachs Group Inc. this year joined other banks in calling an end to the commodities supercycle as China slows. The biggest consumer of industrial metals and iron ore and the largest oil user after the U.S. is headed for the slowest full-year expansion since 1990.

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http://www.bbc.com/news/

Remember the Brics – Brazil, Russia, India, China and South Africa, the nations that were set to reshape the world economy? Two of them, China and Russia have the potential to cause some serious and rather unwelcome reshaping in the near future.

In China’s case it’s the risk that an economic slowdown could turn into something more damaging. With Russia, it’s the possible economic fallout from the conflict in Ukraine.

Four of these five countries – South Africa is the exception – were identified in 2001 as large and fast-growing economies that would have increasingly influential global roles in the future.

Today it’s China and Russia that are potentially the most troubling for the rest of the world in the near term. China’s story is one that we would inevitably have had to face sooner or later. Indeed you might say it is remarkable that it hasn’t come sooner.

China has recorded extraordinary rates of economic growth for a very long time – an average of 10% a year for three decades. But there are weaknesses. It’s based on very high rates of investment, currently running at 48% of national income or GDP.

When it’s so high there’s always a danger that many projects will turn out to be wasteful or unprofitable, undermining the finances of the investors themselves and anybody who has lent them money.

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http://www.marketwatch.com/

Don’t try to catch a falling China knife, says Credit Suisse

NEW YORK (MarketWatch) — The “commodity super cycle” is dead. Now, it’s time to get used to the “commodity super down cycle, and China is the biggest reason why, warn strategists at Credit Suisse in a Thursday note.

Commodity demand tends to be very cyclical. Commodities, however, have been underperforming cyclical indicators of growth, including industrial production and new manufacturing orders (as measured by Institute for Supply Management survey data), they say. Much of the blame is on China, the strategists argue, noting that the country remains the “most significant source” of demand for most industrial commodities.

Moreover, they see China on track for a “hard landing” at some point in the next three years.

The report adds to some of the recent gloom around China, where the fate of the economy remains a topic for debate. Standard & Poor’s Ratings Services on Wednesday said its negative outlook for Chinese property developers is casting a pall on the rest of the Asia-Pacific region, though it sees prospects for the sentiment to recover next year thanks to looser government policies, particularly on mortgages.

The Credit Suisse strategists, meanwhile, see a “triple bubble” in credit, real estate and investment.

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As surprising as it might sound today, we believe the secular trend for commodities has higher elevations to travel, before eventually running its course – possibly as far out as early into the next decade. While in 2011 we became adamant that the thesis trade in commodities – specifically in its leading sector of precious metals, had become crowded and overhyped, those excesses have been wrung out of the markets over the past three and a half years and offer what we perceive to be extremely compelling long-term valuations going forward.

This idea remains supported by our research that implies yields are not headed materially higher anytime soon – despite the anxieties surrounding the Fed raising interest rates over the next few years. Moreover, we expect that real yields (nominal – inflation) will remain suppressed and eventually retrace the rise that began in the back half of 2011.

When the real yield cycle finds its zero bound and breaks below, commodities tend to outperform in the market over an extended period of time. All things considered, the death knell spike in real yields that has historically punctuated the end of major commodity booms in the past – has yet to appear for us on the horizon.

Over the years we have shown a long-term Hawking view of the nominal yield cosmos, which depicts an antithetic and gradual troughing, versus the violent and exhaustive secular peak in yields the markets experienced in the early 1980’s. While 10-year yields this year have retraced back to the mid point of our expected range (1.5%-3.0%), taking into account the symmetrical structure and mirrored return of the long-term yield cycle, an estimated secular pivot higher would not take place until early in the next decade.

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