Investment: Economists see gains in soft commodities this year and H shares look good as inflation recedes at slower pace Economists' forecasts for this year suggest inflation is unlikely to recede as fast as previously thought, but an increase in demand for agricultural products will present an opportunity for investors. According to the Census and Statistics Department, Hong Kong's inflation was 3.4 per cent last November. Some economists estimated that inflation could reach 3.8 per cent this year. Food prices in Hong Kong are set to remain high as a result of rising inflation in China. Swiss bank UBS global outlook report said that China's GDP growth last year was 11.1 per cent but would drop to 9.8 per cent this year. UBS expects Chinese authorities to continue to step up tightening measures and policies in view of the higher consumer price and asset inflation. Elsewhere, inflation risk is a concern for central banks and analysts at UBS said that Asian central banks would probably allow a faster appreciation of their currencies. The US Federal Reserve is expected to cut interest rates this year. The economic fundamentals in Hong Kong this year will be in a good shape with falling unemployment rates, rising wages and falling real interest rates. But UBS estimates gross domestic product growth will drop to 4.8 per cent this year from 6.1 per cent last year. 'Real GDP growth in China and India will become more moderate in 2008,' says Pu Yonghao, head of wealth management research at UBS. 'But growth in these two countries remains strong.' Cuts in US interest rates have propelled the prices of many commodities and this situation will continue this year, according to bank forecasts. For example, the pork price jumped to HK$1,900 from HK$1,400 per 100 catties (about 60kg) in January this year. As demand for meat consumption increases, the demand for livestock and leanhogs is likely to be high. According to Peter Hu, managing director at Barclays Capital, commodities have become more mainstream as an investment in the past few years. The bank has been bullish on soft commodities, including cocoa, sugar, coffee, cotton, orange juice and grains. 'Commodities prices have been making headlines and concerns about inflation have driven investor interest in this asset class,' Mr Hu said. Commodities have been difficult to tap for retail investors unless they have views on specific ones, so most products available are index-linked investments which provide exposure to a range of commodities. Rogers International Commodity Index has been used by Barclays Capital as the main index for its retail fund, launched last November. Mr Hu said that investors were taken by Jim Rogers' views on commodities. Mr Rogers believes that a new bull market is on the way as a result of growing demand for commodities driven by the growth of Asian economies. Barclays Global Commodities Delta Fund has raised US$200 million since its launch. Olivier Godin, managing director at Societe Generale's commodities derivatives structuring, said such open-ended offerings provided an easy way to offer investments which provide long positions on indices for retail investors. The French bank was also bullish on soft commodities and Mr Godin said that gold and silver had always been popular among investors in the Asia-Pacific. 'To protect against inflation, institutional investors in the Asia-Pacific region are increasingly looking at commodities as they tend to perform well in such an environment,' Mr Godin said. 'In the past some investment banks were not willing to take exposure to the forward curve due to the lack of liquidity in certain commodities. We have seen more banks now proposing investment products based not only on indices but also on forward futures contracts. This is especially true for grains and soft commodities,' Mr Godin said, adding that the banks had been working on products that had maturities. Analysts are optimistic about the performance of Chinese equities which have become a staple investment for speculators and equity portfolio holders. But the market will become more volatile this year. Credit Suisse is confident that the H-share market will continue to benefit from the ample inflow of liquidity from private investors from the mainland.