World stock markets have been investment dogs since the credit crunch began in mid-2007. The response of many financial experts to this has been 'don't worry, buy pigs' (or chickens, wheat, coffee, orange juice, soya beans or oil). They are not recommending stocking up on rations. Rather, the advice is that investors who can no longer look at their share portfolios without a stiff drink beforehand should sell out, replacing stocks with sheaves of wheat or iron bars, at least theoretically, by purchasing commodity funds. Governments worldwide are pumping cash into sickly economies at an astounding rate, with China spending US$586 billion on new roads and railways. So commodities may be a decent defensive investment. Hong Kong investors have a wide range of funds available to them. But before buying in as a knee-jerk reaction to stock markets drowning in a sea of red, investors should carefully examine the arguments for and against commodities. Economists say resources are just a play on economic growth. In other words, do not buy them during recessions. 'The performance of commodities depends on how economies are doing,' said Julian Jessop of London-based Capital Economics. After all, commodities are just stuff. And stuff, whether it is the food people buy or the metal factories use to make cars, is consumed more when economies are growing and less when money is scarce. Investors could relate this to their own lives. In Hong Kong, it has become easy to find a taxi, while trams are bursting. This tells us people are consuming less fuel. The cash-conscious are also taking their own lunch to work instead of buying takeaways, consuming less plastic. The opposing theory, generally touted by people selling commodity funds, is that investors should forget the current recession and look to the future. They argue that the world's resources are running out and prices can only climb from here. As China, India and other emerging economies continue to grow, commodities will be in shorter supply, fund managers say, leading to price rises. 'Think about the number of cities that are being built and the number of people that are involved here. Nothing has ever happened on this scale,' argued Bradley George, a commodity fund manager at South African institution Investec. 'The building of the US involved 300 million people. China is over a billion people, India is another billion on top of that. Long-term, demand for commodities will grow.' This may be true, but recent price trends resoundingly show commodities are far from recession-proof. In the economic boom years of 2004-07, commodity prices, like equity, bond and real estate values, generally rose. The CRB commodities index, which tracks the price of everything from copper to lard, soared to a record high of 481 points in February last year, a spectacular 118 per cent gain from March 2002. But with much of the world in recession, demand for most commodities has tumbled, taking prices down with it. The CRB index has languished at about 310 points. Copper has crashed from US$8,900 a tonne in February last year to US$4,019. Oil is trading at about US$50 a barrel from an all-time high of US$147 early last year. Even pigs have turned stinky, with lean hogs selling at US$58 apiece after bouncing to an US$89 high in August. 'If economic growth is high, commodity prices tend to rise, and the reverse is true in recessions,' said Mr Jessop. 'The same happens with shares and most other asset classes.' What Mr Jessop did not point out, however, is that in the last economic boom, commodities did much better than shares. During 2002-08, when commodity prices soared 118 per cent, the MSCI world equities index rose 42 per cent. Still, the jury is out on whether this stellar performance can happen again. Even Mr George admitted it had not occurred before. The fund manager reckons, though, that the 2002-08 period was just the beginning of a new paradigm. This was a time, he said, when a huge surge of demand for resources came from emerging economies such as China and India, an event unparalleled in history. Jim Rogers, a former hedge fund manager who has formed his own commodities index to track world resources prices, also believes the rise of emerging markets will support commodity price rises. 'The best way to invest in China is to buy commodities,' he said at Hong Kong's Money Show this month. Mr Rogers often talks about a 'commodities supercycle' that will cause demand to grow inexorably as emerging economies boom. 'The [average Chinese person uses] 0.049 barrels of oil a day. Americans consume 0.677 barrels per day,' he explained. 'This will change - there are 3 billion people in Asia who want a better life.' The latest World Energy Report forecast that China, India and other emerging markets would fuel energy price rises for the next two decades. It projected that world energy needs would be 55 per cent higher in 2030 than in 2005. And it claimed oil demand would reach 116 million barrels a day in 2030, 37 per cent up on 2006. The point about oil demand is that it mirrors demand for other commodities. But Mr Jessop remains unconvinced. 'In 20 or 50 years the chances are we won't use that much oil anyway. The Stone Age ended because people ran out of stones. Technology happens. Perhaps in 50 years we will be driving electrical cars fuelled by nuclear power,' he said. He also opined that the power of population growth was far 'greater than the power in the earth to produce subsistence for man'. The huge rise in commodity prices until last year also suggests that investors thinking of getting in now may have missed the boat. Resources have already been a hugely popular investment. There are no official figures on this, but by Mr George's estimates, about US$100 billion flowed into commodity funds between the beginning of 2005 and early last year. Some economists believe this was just an investment bubble formed by a good story, similar to the dotcom boom. China probably will continue growing. But while the internet undoubtedly changed most people's lives, this did not stop dotcom firms' valuations crashing to Earth. 'It was really down to the so-called supercycle theory which started after 2003,' said Morgan Stanley China strategist Jerry Lou. 'The world was full of liquidity, and commodities was a better play than equities on the upside, but I wouldn't try to project this will be a recurrent pattern.' Mr Lou is also sceptical that China's economic growth can last forever. Beijing is funding infrastructure projects, which will probably heighten demand for commodities on the mainland in the short term. But Mr Lou is uncertain whether this will continue for long. Beijing has huge foreign-currency coffers, but they are not a bottomless pit. 'China will be shifting its strategy in terms of stimulus directions,' he forecast. And even if China did carry on building roads and railways for years to keep its population earning money, Beijing cannot support world commodity prices alone. Mr Lou noted that the countries of the Organisation for Economic Co-operation and Development accounted for 70 per cent of the demand for metals. 'I don't see how China can sustain [commodities] prices by itself.'
