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MONTHLY INSIGHTS
 
(30/06/2015)

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In this month's edition of Fairtree News we focus solely on commodities.  The big question remains: 

WHAT'S UP WITH COMMODITIES?



Author: Jacobus Lacock
 
Executive Summary:
  • The aggressive fall in commodity prices should benefit global growth over the coming years.
  • Countries highly dependent on commodity exports face downside risk to growth.
  • South Africa’s capital markets remain relatively attractive to other emerging markets.
  • The Chinese Yuan should continue to weaken gradually over the next 18 months.
  • The US Fed may consider to raise rates later this year when more evidence of inflation emerges.
The commodity boom cycle continues to unwind

The Chinese growth induced commodity boom cycle of the previous decade continues to unwind. Over the last two months we experienced another precipitous fall in commodity prices.  The oil price dropped 20%, while copper, iron ore and palladium saw a double digit decline. Gold and platinum fell 8%. Industrial commodity prices have now declined 45-60% since the peak earlier in the decade and broad-based commodity indices have fallen back to early 2000 price levels. Read more

Commodity consumers are major beneficiaries

On aggregate, lower commodity prices benefit global growth. Production is a function of labour, capital and productivity. Economies expand as populations grow, machines are built and technological advances improve productivity. Commodities are a key input into this production function:  agricultural commodities sustain population growth; industrial metals are used to produce machinery; minerals are used in technological innovation; and energy facilitates the distribution of capital, labour and technology. Lower commodity prices mean that the cost to sustain population growth, build machinery and to develop technology decreases. As growth is produced at a discount, discretionary spending and savings increases.
  Read more

To read the full article please click here.
 
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PORTFOLIO MANAGER VIEW
 
As the commodity sell-off continues, one may wonder when will be the opportune time to increase exposure to resource equities. Stephen Brown, portfolio manager of the Fairtree Equity Prescient Fund, believes one first needs to see a marked improvement in the free cash flow generation of the resource businesses. Stephen notes free cash flow generation requires profit margins to improve, which in turn is a function of either reduced commodity supply or higher demand. We don’t see a reduction in commodity supply nor an increase in commodity demand anytime soon.
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