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Four Key Investment Themes for 2008
1. Agricultural Commodities – A Lagging Asset Class Emerging market industrialisation, population growth, and accelerating emerging market inflation is combining with tight inventories and eroding global planting and harvest areas to create upward pressure on agricultural commodity prices.Industrial metals (such as steel and copper), energy (such as oil and gas) and to a lesser extent, precious metals have already begun to price in this new environment. However, agricultural commodities tend to lag other commodities, creating an opportunity for investors in 2008.2. Emerging Markets – Robust Economies and Attractive Earnings Emerging market economies appear more sheltered from the credit-market dislocation in the United States and Europe. Assuming that the United States economy experiences a soft-landing, rising emerging market inflation combined with strong real growth creates the prospect for solid nominal earnings growth. Attractive valuations combined with large pockets of liquidity present opportunities in regions such as Latin America, the Middle East and Asia. A weak U.S. dollar, strong regional currencies and robust commodity prices, for example, should support equities in Latin America. 3. Infrastructure and Energy Needs – Meeting Growing Needs Political, social and economic developments in many emerging countries have fuelled global demand growth that has outpaced infrastructure investments across many different sectors. Asia’s infrastructure needs alone are estimated at $180 billion by the end of 2010. Developed markets, on the other hand, maintain a rising demand for replacement infrastructure. In addressing the need for investment in infrastructure, governments are also opening the sector increasingly to private sector participation. Opportunities exist in construction and building materials while rising energy costs, regulation and pollution control are driving heavy research spending in alternative energy sources. On top of its strong cash flow characteristics, low correlation with other asset classes and a low volatility of returns, infrastructure presents interesting opportunities. 4. Distressed Assets – Opportunities Amid Distress Distressed strategies have tended historically to perform well in periods of high volatility and credit spread widening. Historically, a pick-up and a peak in lower-quality issuance as a percentage of total new issues in the United States credit market low-grade credit issuance, as seen from 2004-2007, has preceded an acceleration in credit default rates. Opportunities exist for investors to take advantage of the upside created by the credit dislocation when prices in certain sectors are depressed by forced selling.Credits: CitiBank|
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