Portfolio Manager Perspectives

Jeff Benjamin

Advanced Equities CIO: Investors must now think outside the box with commodities

Oct 28, 2009 @ 1:30 pm

By Jeff Benjamin

Growing demand for commodities in emerging and developing markets requires a new way of analyzing commodity investment strategies, according to Thomas Samuelson, chief investment officer at Advanced Equities Asset Management.

Mr. Samuelson, who views commodities as a separate asset class that is in the midst of a long-term secular bull market cycle, said investors need to look beyond traditional calculations related to U.S. consumption of the raw materials.

From both a technical and fundamental perspective, the case for commodities is difficult to ignore, he said.

“Commodities are riding the consumption curve, and there's still a long way to go,” Mr. Samuelson said.

For example, he explained that China is currently consuming 1.2 barrels of oil per person per year. In the United States, the consumption rate is 26 barrels per person per year.

“If China just goes from 1.2 barrels of oil to 4 barrels, that creates 10 million barrels a day worth of incremental demand, and there's only six million barrels per day of spare capacity right now,” Mr. Samuelson said. “We're riding the consumption curve as places like China and India go from bikes to mopeds to cars.”

Global demand for commodities, he said, represents “a passing of the torch” from the U.S. to several emerging economies.

Car sales in China, for example, are up 28% so far this year with 12 million cars sold, which compares to 11 million sold so far this year in the United States.

“You'll see the same demand curve for everything from refrigerators to air conditioners to cell phones,” he said.

The new paradigm in commodity consumption can be traced in part to the size of the emerging market economies.

The gross domestic product of all emerging markets is now at $16 trillion, which compares to $14 trillion for the United States and $13.5 trillion for the Euro zone economies.

This increased demand helps explain why commodities have been out of sync with past economic cycles, and have not waited for the U.S. economy to recover, Mr. Samuelson said.

“Crude oil usually bottoms after a recession ends, but this time it bottomed in December, while the stock market hit its low in March,” he said. “The cycle is different this time because emerging market demand is alive and well.”

While gold and silver typically get all the attention for their hedge against a weaker dollar, aluminum has gained 53% this year, zinc is up 93% and copper gained 114%.

Another way of measuring demand is the Baltic Dry Freight Index, a shipping cost indicator that reflects dry bulk consumption.

The shipping cost index is up 37% in October and 290% so far this year.

Mr. Samuelson, whose firm manages more than $500 million, will allocate up to 9% in balanced portfolios to commodities.

Twenty-one of the 28 commodities he tracks are in bullish territory, with their 50-day moving average price currently above their 200-day moving average price.

“There will be short-term ups and downs, as we saw over the past year when commodities went into hibernation for a bit,” Mr. Samuelson said. “There's clearly more going on here than just a weak dollar.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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