| Q&A with Aaron Smith, managing director of Superfund Financial Singapore, which looks at markets from the view of a managed futures specialist |
 With more news headlines reporting improving manufacturing, export, trade numbers and with now some central banks looking to hike interest rates, what is Superfund's view of the outlook for the global economy? Are we finally bouncing off the bottom of the cycle into a V-recovery?
Unemployment rates are still soft in the United States, and interest rates are not likely to be hiked and if at all, it will be minimal. The low interest rate environment has motivated consumers in the US to reduce their household debt. Currently, the stock market and the economy are behaving differently, and we don't see the economy going anywhere in the next 12 months. If anything, it will be slow growth.
Here in Asia, equity markets have factored in growth already, and stock markets have bounced off very aggressively. In Singapore, the government's economic stimulus package has worked very well to manage unemployment from increasing beyond current rates, and low interest rate environment has caused people to shift their savings into property, which is why we continue to see prices of property climbing. Although Asia seems insulated from what's happening in the United States and Europe, in order to experience full recovery, invariably the US and Europe need to recover as well.
What are key economic trends and currency trends that are affecting demand/supply, consumption, hence prices of commodities?
We think the US dollar is a bad bet currently, as it will continue to devalue and there is already a shift into safe haven instruments such as commodities, real estate and gold, and this will continue. Commodities unlike stocks have real demand, for example in Asia, as governments in both China and India continue to seek better infrastructure, and consumers faced with limited investments and low interest rates park their money in properties. We believe this cycle will continue as long as the interest rate environment is low and fiscal spending continues.
Oil prices seem to be picking up again despite the fact that global recovery is not really evident yet. How high do you think oil price will rise (and fall subsequently)?
Oil is basically sensitive to the movement of the US dollar. Usually at the end of the year, the demand from refiners tends to be lower but the dollar is weak. As trend followers, we were long on crude when it ran up to US$150 and then short before it fell to US$45, bearing in mind that we didn't buy at the bottom nor get out at the top but we followed the trend. Nobody could have predicted that crude could reach US$150 or fall to US$45, that's the beauty of trend followers (based on technicals), it doesn't matter to us, and we just buy if there's a breakout and get out when the trend reverses.
One of the reasons for the rise of crude prices is the weakness in the US dollar. What's your outlook for the greenback and other major currencies?
The US dollar will continue to devalue as long as the government continues to print fiat money. The Aussie dollar is strengthening relatively as it is backed by commodities and it will be a safer haven compared to other currencies.
What is the outlook on gold? What are the factors now shaping prices and demand today?
Gold prices will still continue to strengthen and we believe, will hit US$1500-2000 in the next few years. If you look at gold inflation adjusted, it is still below its high. The main reason is not because gold price is going up but because the US dollar continues to weaken. There's no safe haven in the modern world, we are living in a market built on credit. The US dollar used to be pegged to the gold standard, and so was the English pound. Today, not one currency is tied to a physical value. If the markets remain in uncertainty – for example, where unemployment in the US continues to worsen or doesn't improve, coupled with low interest rates – investors will be forced to seek safe haven and one of the best picks is gold. Gold is the easiest commodity to purchase & store, has a market value, liquidity and as good as cash. Other commodities are difficult to store, perishes or doesn't have a recognised standard in pricing.
Your outlook on hard and soft commodities?
As trend followers, we don't have a particular outlook from a fundamental perspective. We are currently long on gold, silver, palladium and short on corn as these are the current trends. We are also long on sugar and cocoa as we see that they have made 30-year highs, short on wheat, long on oil and long on most of stock indices. Soft commodities are extremely important as they affect our daily lives more than any other product. For example, when corn gets expensive, live cattle gets more expensive to feed, therefore milk also becomes more expensive. Soft commodities have tremendous upside potential and we are in the beginning stages of a commodity super cycle. However, there is a perpetual ebb and flow between supply and demand, which is why managed futures are so important. We are the only asset class that can take advantage of rising and falling prices.
What's Superfund's current outlook for the equities market till year-end or early next year?
We are long on equity futures at the moment and will continue to stay in the position until the trend runs out. For individual investors, the idea of buying and holding is antiquated. The past decade of the market's roller coaster ride has returned basically nothing to investors, but the downside risk is always 50-80% whereas managed futures the downside risk is significantly less because of the risk management and automated stop loss mechanisms in place. Equities are poor risk-adjusted investment for the next decade. However, if an investor must have equities, they should look to diversify their portfolio in low correlated investments.
What's Superfund's advice to investors looking to get in onto commodities or commodities equity stocks?
If investors want to have exposure into commodity, it's better to be exposed through managed futures, as we are 45% commodities in both long and short or then to actually have some physical gold and silver. When you buy commodity stocks, you are exposed in the equity markets, the balance sheet of the company, management and so on, hence your exposure to commodities is very little. The main reason investors should have exposure in commodities is the low correlation to traditional assets like equities, bonds, real estate. If you are buying commodity stocks, you're adding more exposure in equities and have not diversified your risk (strong correlation between commodity stocks and equities).
Having said that, all investors should make it a priority to understand what they are investing into before making that decision. It takes time to learn various products and investments but it is worth it as it's your own hard-earned money. You should never invest into something you don't understand.
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