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Commodities trump stocks as long-term bet

Commodities trump stocks as long-term bet
Thu Feb 23, 2006 8:39 AM GMT
By Jeffrey Hodgson and Nao Nakanishi

HONG KONG (Reuters) - Oil, gold, grains and other commodities will outperform stocks and bonds in coming years, even after the rallies that have pushed some prices to historic highs, investment adviser Puru Saxena said on Thursday.

Saxena, whose Hong Kong-based firm manages money for high-net worth individuals, told Reuters that not only are raw materials such as energy and food in short supply, but the average investor has yet to put any money into the asset class.

"Not many retail investors have even taken a position in commodities, so how can it be the end of the boom?" he asked, adding there were only a handful of commodities funds for retail investors, compared with more than 30,000 for equities and bonds.

He has invested an average of 65 to 70 percent of client money in commodities, a strategy he said has helped generate returns of 18-20 percent annually in the past 4-5 years. The firm does not disclose the size of assets under management.

"When commodity prices start rising due to supply and demand imbalances, then financial assets generally tend to under-perform," he said. "Investors ... need to take positions in commodities for the next 10 to 15 years."

Saxena foresees a multi-year commodity boom driven by soaring demand from China, India and Brazil, and augmented by decades of under-investment by producers.

Rising inflation and the risk of a slide in the U.S. currency also makes commodities, priced in dollars, an attractive hedge, he said. Geopolitical uncertainties, such as the war in Iraq, add to the attraction of tangible assets like gold.

Fund flows into commodities in the past few years have already helped push crude oil prices to around $60 a barrel from below $20 in 2001. Gold now trades at about $555 an ounce, up from below $350 in early 2003.

Copper, a base metal used in everything from electrical goods to water pipe, is hovering just below $5,000 a tonne, up from around $1,600 early in 2003.

FOOD IN THE GAS TANK

The investment adviser said he is now most bullish on agricultural commodities, such as corn and sugar. He noted that high oil prices are encouraging the use of alternative energy, including bio-fuels, produced from grains or vegetable oils.

Commodities trump stocks as long-term bet
Thu Feb 23, 2006 8:39 AM GMT

"If you look at the global stockpiles of food, they are extremely depleted ... If more food ends up in the gas tank, the prices are going to go up," he said.

"This stuff has never been cheaper. I don't think you can go wrong. The downside risk is extremely low and the upside potential is huge," he said, referring to grain prices that have remained little changed in the past few years.

Saxena predicted that within 10 years oil will hit $200 a barrel.

"Crude oil, natural gas, we have started buying now ... also I think nuclear power is the way of the future. China has recently announced they are building 30 nuclear reactors, so the smart investor knows that you want to buy uranium," he said.

Saxena's enthusiasm for commodities, and antipathy to traditional assets, is longstanding.

He said he largely pulled clients out of U.S. equities five years ago, and currently invests only in Chinese equities, which account for about 15 percent of his portfolio.

"At this point in time, most of the equity markets are quite overvalued and should there be any political unrest in Iran, and oil spikes up in a big way, then equities will have a serious correction," he said.

"Bonds I think are probably the worst investment for the next 10 years, because interest rates are only just starting to rise. My own guess is five years from now, when we look back, we will wonder why we thought that rates were going to stay so low."

Saxena said the remainder of his model portfolio is in cash, held as yen, which he hopes to use to buy Japanese stocks if there is a near-term pullback.


LINK: http://today.reuters.co.uk/Funds/FundsArticle.aspx?type=fundsNews&storyID=2006-02-23T083924Z_01_...