Stephen Gunnion
3 December 2008
Johannesburg — COMMODITY prices should rebound from their low levels as China leads the world out of recession in the second half of next year, Investec Asset Management strategist Michael Power said yesterday.
A weaker dollar -- likely once the economic turmoil abates -- will also benefit resources companies. Several countries, including most of Europe, the US, Canada and Japan, are already in recession. Although China is far from recession, growth is expected to slow to about 9% this year and 7,5% next year. Previously, China reported double-digit growth.
Power said the low point of the recession would probably be reached in the first half of next year. While economic recovery in the east was likely to be U-shaped, the recovery in the west and Japan would be more protracted, or L-shaped, he said.
Power said other companies with a focus on China should also do well as the balance of economic power shifts from the west to the east over the coming years.
These included luxury goods group Richemont, SABMiller and media group Naspers. Standard Bank would also benefit from an increasingly powerful China due to the 20% stake owned by Industrial and Commercial Bank of China, which is likely to result in increased trade finance business.
Power said the US's position in the world was declining dramatically, while the east was gaining prominence. China was expected to generate 70% of growth globally next year. India was also becoming increasingly important, he said.
"That tells us something about the shift in the balance of economic power," Power said. The dollar's position of strength would also be challenged.
Power said the dollar had been strong for all the wrong reasons over the past six months. Once the market and economic turmoil had abated, probably in the middle of next year, the dollar would weaken as investors looked for higher growth opportunities.
"We are going to see the emergence of growth-based carry trade out of the US as capital looks for the greener pastures of growth," Power said.
Power said if the dollar weakened dramatically, such as a fall of 30% on a trade-weighted basis within a short space of time, gold could potentially shoot up to $2000/oz.
In the longer term, Power said other currencies would gain importance, including the Singapore dollar, which was beginning to be seen as the Swiss franc of the east.
Power said many Asian economies were in better shape than western economies, with high levels of savings and smaller, if any, budget overruns.
He said there was already a shift to include more emerging market countries in decision making, with the G20 group of countries replacing the G7.
Meanwhile, Jeremy Gardiner, a director at Investec Asset Management, said that following the recent rout it appeared the markets were poised to start moving sideways. However, some market commentators still expected more big drops in equity prices.
"There's a lot of money waiting to go into the market, but nobody wants to commit to a market that can go down 10% in one day," said Gardiner.
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