This article from the print edition of The Economist provides a "global perspective" summary of the problems facing the commodities sector. (A silver lining in the intermediate term might be that about 80% of the US economy benefits from lower commodity prices.)
"A resurgent dollar has hammered commodity prices: many have recently fallen below their levels of a decade ago. That is a fate not shared by other tradeable assets..."
"Capital is still pouring into holes in the ground, creating a hangover that may last at least a decade."
"...the supply glut is being fed by three common factors. Cost-cutting has led producers to think they can bear the pain of falling prices for longer. Heavy hitters, whether OPEC princes or global miners, still yearn to increase market share. And funding is still available."
Link To Economist ArticleIt doesn't look like registration is needed to access this article. But, if it is, its free.
Comments
Not sure what to make of all this. I'd been slowly adding to some energy names and BBL, but maybe I need to stop digging myself deeper. I've kind of got a natural hedge though, since I live in Brazil but earn in dollars, so when commodity prices fall, the Brazilian currency and my living expenses fall too...
And some of the rock solid names are looking very cheap. Exxon's yielding over 4%.
That has to be working out pretty well. Can I ask how things are going in Brazil? I mean, I know what I read but would love to get a better sense from someone there. Thanks.
I can see a scenario in which the country turns things around in about a year: an electoral court decision annuls the last election for corruption, then there's a new election in which the opposition, pro-market candidate wins with a major mandate, etc. This is actually quite plausible and would lead to asset prices here skyrocketing.
I can also see a scenario in which a weak president and a corrupt Congress, both generally hostile to the markets, let the country descend into an Argentina-like mess.
And there are middle-of-the road scenarios too.
So, high risk, high potential reward. I will say that in the part of Brazil where I live, the economic heartland of São Paulo, people are hardworking, resourceful, and ambitious. It's like New York that way. My maid's son just took a new job with a four-hour round-trip commute because it'll let him use the skills he picked up in a welding course he did weekends while workinga 50 hour week in construction. That sort of thing is common and I think underappreciated outside of Brazil. People go heavily into debt to pay for education, which unfortunately is usually poor quality, but that's not their fault.
A good government could really turn things around, no matter what happens to global commodity prices. Exports are only a tiny part of the economy. Domestic consumption matters much more.
FWIW, Brookfield is starting to buy real estate here again, PE firms are raising money for Brazil funds, and the head of Goldman Sachs down here told me about two months ago that he'd start getting interested when the exchange rate hit 3.50, which it has.
But these are obviously investors who can get deals that you and I can't and have a very high risk tolerance. They're not buying stocks, they're buying properties and companies at bargain basement prices from owners getting screwed by the recession and surging interest rates.
Brazil's definitely not a sure bet, like it was in 2002. Personally I'm waiting to pull the trigger though I have some exposure via SFGIX.
BPY is maybe a good way too to get some Brazil exposure, thanks for bringing that to my attention.