A few days ago we took profits on client positions in general commodity etfs. The surge in oil and metals prices from the lows had been impressive. Chinese restocking, excess Chinese, Indian and US liquidity and investors looking forward to recovery combined to increase commodity prices.
The long term case for commodity investment remains strong. As Asia joins the world party, so demand for energy and metals will continue upwards. Adding a billion or two to the numbers of people in the world who can afford fridges, washing machines, cars and better homes will add greatly to the demand for basic commodities.
In the short term we felt that markets had adjusted enough to the realities of the recovery, and were in danger of overdoing their enthusiasm given the stresses and strains that remain in the principal western economies.
We are now at that point in the recovery where India and China have to take measures to curb inflationary pressures. Meanwhile news from the old world of Euroland, the UK, Japan and even the US is mixed at best. There are reasons to worry about the impact on world demand of the next phase of saving and debt repayment in the overextended private sectors of the USA and the UK.
The US, UK and Euroland will be showing substantial private sector surpluses this year. Companies and individuals are much more reluctant to get into debt than they were in 2006-7. Money is still tight and scarce for many in the business world or for those seeking a mortgage. As a result we should expect subdued consumption growth. The big driver of the 2007 boom, debt fuelled consumption in many parts of the west, will not be the same force in the recovery.
The tensions this year arise from the wish of the UK, the US, the Club Med and other overextended economies to join the list of countries that follow a path of export led growth. Japan, China and Germany are reluctant to give up this model which has served them well in the past, so all too many countries are now seeking to export for growth, against the background of a world market with insufficient demand for all their output. Countries are seeking competitive devaluations, or are sticking with currency pegs like the Chinese one to try to avoid revaluation.
How will these tensions be resolved? The dash to the bottom in the currency race will ultimately only be successful for the worst managed economies. We expect China to give some ground on the yuan in due course this year. Individual countries will be forced in to greater rectitude in their public finances by market pressures, as we are seeing with Ireland and Greece.
Meanwhile the new vogue amongst banking regulators for greater prudence places a lid on the growth rates of the western private sectors. We should expect hesitations and worries about the pace of the recovery, and concerns about the overall world economic performance, all the time private sectors are saving more and banks are being forced to hold more cash and capital. It seemed to us a good idea to take a little risk off the table whilst markets digest some of the worrying news on activity and confidence that is now coming out.