Philipp Vorndran, senior strategist for the asset management business of Credit Suisse, believes investing in energy and other commodities is the right course as they will deliver out performance over the long term.
Although short term setbacks are likely for some commodities, due to speculative over heating, the supply and demand situation has triggered a long term uptrend in that will remain for some time, Mr Vorndran suggests.
We believe that the demand for commodities will persist for three reasons. First, the migration from rural to urban areas in countries such as India and China will drive further demand. As urbanization takes hold, this dramatically increases the need for several commodities, for example energy, water and metals. Then, as development continues and wealth is positively impacted, this results in further demand for a wider range of commodities.
Second, supply side limits look probable, particularly with energy and water. If we take the example of North Sea oil, this is likely to run out within the next two decades. As a result, consumers will be forced to use Middle East oil, which is of lower quality and therefore less efficient. This creates significant pressures.
And third, the trend of quasi re-nationalization, as seen in Venezuela, Russia and now in Ecuador, Bolivia and most probably Peru, will result in rising raw material costs over the medium term, as this new risk demands that investments in production be recouped ever more rapidly.
Furthermore, Mr Vorndran added that there are fears that this trend will soon spread further within Latin America to countries such as Argentina, and even on to Africa.
