Inflation to fuel commodities: Coxe
David Berman, Financial Post
Published: Thursday, January 03, 2008
The problem with being right about a prediction is that it puts a lot of pressure on you to continue being right. Donald Coxe, global portfolio strategist at BMO Financial Group, is in this unenviable group of prognosticators thanks to his bullish call on commodities five years ago.
His encore call? "Over the next five years, commodity stocks' outperformance of most major indices will be, we believe, at least as great as in the past five," he said in his latest published commentary.
Far from simply projecting the recent past on to the future, though, this renewed enthusiasm for stuff like base metals, precious metals and crude oil is actually remarkable given that Mr. Coxe sees the bull market's source shifting from Chinese demand to something else: bigger, nastier inflation.
Inflation has been on the rise in the United States and Canada in recent years, largely the consequence of surging energy prices that have trickled down to other products that are bought and consumed, particularly food.
This is why central banks had been on a campaign to raise interest rates until recently, when slower economic growth, a horrendous U.S. housing market and a global credit crunch got in the way.
Since then, rates have either been on hold (in Canada) or on the way down (in the United States), with many observers coming to the conclusion that inflation is no longer a problem in the longer term.
But it is, according to Mr. Coxe--and it is going to show up in the form of substantially higher food prices, which are far more noticeable, and painful, to consumers than rising energy prices. Already, crude food prices have risen 26% this year and finished consumer foods are up nearly 7%. Now, get ready for a protein boom.
"Nowadays, the burgeoning Chinese middle and upper classes' demand for meat and dairy products means that growth in China's consumption of feed grains is much faster than its famously growing demand for oil and metals," he said.
This demand comes at a time when the United States and Europe have artificially boosted the demand for ethanol, which is making food-price concerns even worse because it means less acreage for other grains. Add in the fact that U.S. interest rates are falling and the U.S. dollar is sliding, and Mr. Coxe concludes that troublesome inflation cannot be far behind.
Commodity stocks have risen over the past five years largely because of surging demand for commodities. But commodity stocks, traditionally, have also been used as a hedge against inflation -- an attribute that has not been tested in recent years because inflation generally has been low.
If inflation is on the rise, investors will take commodity stocks to new heights as they seek a haven from rising prices. As a result, these stocks will trade not just on earnings but on substantially higher price-to-earnings ratios as well -- a highly favourable condition Mr. Coxe calls a "double-barreled commodity stock boom."
To capitalize on it, he recommends gold exchange-traded funds in particular. Yes, gold has been the right call over the past five years. But according to Mr. Coxe, the fun has only just begun.
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