Commodities hogging spotlight
By Dexter Tan

Looking at the top performing funds for June 2008, we see that commodities have continued to outperform the other asset classes while equities have been feeling the heat from inflation and from the de-leveraging process of European and US financial firms.

Crude oil had been trending higher as a result of higher demand and tight supply as well as the heightened geopolitical tension between Israel and Iran over the nuclear issue. If that conflict were to escalate in the Middle East, you can be certain that the price of "black gold" will trend even higher.

It is our view that commodity prices will likely remain buoyant or even trend higher on the assumption that inflation will stay at elevated levels.

In fact, we are starting to see investors being more concerned about inflation and how their investments can be protected against inflation. Among the asset classes available, one of the better options for the short term would be commodities.

In the commodity space, we currently like agriculture. Soybean prices, for one have been hitting new highs on concerns that the floods in the US Midwest have damaged both planted crops and crops land hence affecting supply, which in turn has led to higher soybean prices.

The European Union is also planning to restrict the use of a number of pesticides on the grounds that the fungicide, Triazoles poses potential harm to human hormones. If the ban were to be effected, the fungicides that are used to control diseases in wheat would cause a loss in crop harvest yields. This drop in supply could also lead to higher prices in future.

Furthermore, it has been reported that Australia, which is currently experiencing its worst drought in a century could see higher incidences of such extreme temperatures. (The Straits Times, 8 July). The news report cited the country’s agricultural minister, Tim Burke noting that instances of extreme temperatures, which currently occur once in 20 to 25 years are forecast to happen once every two to three years from 2010 onwards.

Demand is also driving agriculture prices. A recent article by The Guardian reported that consumers in countries like China and India are spending more on improving their diet, hence driving up food prices.

The United Nations Office for the Coordination of Humanitarian Affairs has also made a call to agricultural producers to invest more in agriculture. The fact that there is now such an urgent need for more investments highlights the fact that current resources may not be sufficient to meet demand and supply.

Thus, It is our opinion that the agriculture sector remains an attractive option for investors.


Please also see latest Merrill Lynch monthly report on commodities.

The writer is an investment analyst with Unit Trust, Phillip Securities Pte Ltd.




Disclaimer:
This article is intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in this document are subject to change without notice. Unit trusts are not obligations of, deposits in, or guaranteed by, Phillip Securities Pte Ltd ("PSPL") or any of its affiliates. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in this document are not necessarily indicative of future or likely performance of any unit trust. PSPL, its directors, connected persons or employees may from time to time have an interest in the funds mentioned in this document. Investors may wish to seek advice from a financial adviser before making a commitment to purchase the funds mentioned. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the fund is suitable for them. Whilst we have taken all reasonable care to ensure that the information contained in this article is accurate, it does not guarantee the accuracy or completeness of this article. The companies and their employees mentioned in this article cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in this article may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in this article.

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