Commodity Boom Driver of Emerging Market Powered Global Decoupling?

``Commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. Developing, BRIC-like economies are obvious choices for investment dollars.”-William Gross, Pimco, Hmmmmm?

Faced with oil at $135, global equity markets fumbled over the week over the prospects of “inflation” according to mainstream media.

We doubt such premise. As we have earlier pointed out in Has Inflationary Policies of Global Central Banks Boosted World Equity Markets?, our view is that a recessionary risk in the US has been more of a force to reckon with. Higher oil or food prices simply compounds the economic woes of the US.

Major US benchmarks fell hard this week with the Dow Jones Industrials losing 3.91%, the S & P 500 down 3.47% and the Nasdaq down 3.33%. Surprisingly, global markets had been least affected compared to the past.

In fact, a key emerging market benchmark, the MSCI Emerging Market index earlier in the week managed to recoup the year’s losses (Bloomberg) but fell back following this week’s correction. As of Friday’s close, the MSCI EM is down 3% after falling as much as 16% in March.

Figure 6: stockcharts.com: Soaring Commodity based Benchmarks!

Yes, despite record oil and food prices, major commodity bellwethers as in Brazil’s Bovespa (upper window), Canada (Dow Jones Canada-main window), South Africa (Dow Jones South Africa-pane below center window) and Russia’s RTS (lowest pane) have all been drifting at fresh record highs as shown in figure 6.

While one may argue that three of the four indices are major oil exporters, this hasn’t been entirely the case for all major oil exporters if one considers the performances of the GCC countries. Among GCC states, Oman, Bahrain and Qatar are now at record high levels, while UAE, Saudi Arabia and Kuwait have been drifting sideways. In Asia, only Thailand, a non oil exporter, among all Asian countries seems to be fast closing in on its previously set record.

The point is that the commodity boom has managed to keep emerging market indices afloat despite the ongoing travails of the US and some European countries. The trend is likely to continue over the long term.

For the Phisix, as a former major commodity exporting nation, the bullish sentiment on commodity exporting countries should spillover to our equity assets. Maybe not all, but on select commodity related issues.

Yes, goods and price inflation poses as a threat to the economy but it does not necessarily mean equity markets cannot survive as previously discussed in Phisix, Inflation and the Available Bias and Inflation Data Brings Philippines Into Deeper Negative Real Rates; NOT A Likely Cause of Today’s Decline. Essentially there will be assets that would still benefit from such environment.

If we are to see a reprise of the real asset boom of the 70s to the 80s then as the table 1 shows (courtesy of Dr. Marc Faber) and as previously discussed in September 2005’s Gold At Fresh 17 Year Highs; Currency-wide bullmarket begins!, a similar pattern of return distribution could emerge where commodity related investments are likely to outperform the market.