The Hindu Business Line : ‘Commodities could weaken as world growth slows’

Analysts see the recent slide as further proof that oil is in a bubble, as both the doubling of oil in one 1 year and the recent fall is not linked to any fundamental reason.

Kumar Shankar Roy

Moody’s Investors Service has recently said inflation has raised the risk of an adverse global economic scenario.

That puts the fate of the already battered stock markets in more than a spot of bother, doesn’t it?

Asian stocks declined for the fifth week in six, driving MSCI Asia-Pacific Index to the lowest level since October 2006, according to Bloomberg data.

With pessimism ruling high, there has been selling across markets. According to fund tracker EPFR, long-only dedicated emerging market equity funds saw net cash outflows of $1.7 billion in the latest week, while international funds saw net cash outflows of $2.2 billion.

Developed markets such as Europe and Japan also did not attract inflows.

Vietnam, where the benchmark stock index is down nearly 50 per cent this year, apparently seems to have provided some ‘value’ which explains net inflows to the tune of $32 million.

Many investors and strategists have viewed the latest weakening of crude oil, which recorded its biggest weekly drop in three and a half years (down $15 a barrel), as positive for stock markets.

Analysts see the recent slide as further proof that oil is in a bubble, as both the doubling of oil in one year and the recent fall is not linked to any fundamental reason.

“The fall is likely to be short-term in nature as crude may go up if actual problems such as pipeline disruptions and weather-linked shortages hit, now that hurricanes may arrive,” Mr David Kelly, Chief Market Strategist, JP Morgan Funds, told Bloomberg TV in a recent interview.

Commodities had a bad week. Strategists at Merrill Lynch & Company and Morgan Stanley said investors should sell commodities stocks because a slowing global economy will cut demand for raw materials such as copper (down 2 per cent for week), nickel (down 5 per cent) and corn (down 11 per cent). Commodity-centric hedge funds could have a tough time attracting new investors.

The year 2008 has seen the worst inflows into hedge funds since 2005 with the first half drawing a mere $29 billion, as compared with $120 billion in H12007, according to Hedge Fund Research data.

On the flip side, if commodities slide, respective central banks and governments in many Asian countries may get some relief as containing inflationary expectations will be much easier.

The authorities have time and again found it difficult to rein in accelerating inflation and have sacrificed growth, scaring away foreign and domestic investors.

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